ETFs Outpace Mutual Funds with $258B Inflow, 123 Closures in '24

Key Takeaway

• Mutual funds face a net decline for the ninth consecutive year, with 123 closures versus 95 launches in 2024, highlighting a shift to ETFs.
• ETFs have attracted $258 billion in 2024, outpacing mutual funds' $114 billion outflow, underscoring their growing preference among investors.
• The trend towards ETFs is driven by their cost efficiency, convenience, and compatibility with modern investment strategies.

Mutual Funds vs. ETFs: A Shifting Landscape

The mutual fund industry is witnessing a significant transformation as investors increasingly favor exchange-traded funds (ETFs) over traditional mutual funds. This year alone, 123 mutual funds have shuttered, outpacing the 95 new launches, marking the ninth consecutive year of net closures. This trend is underscored by the outflow of nearly $114 billion from mutual funds in 2024, while ETFs have seen an influx of approximately $258 billion, according to Investment Company Institute data. Despite bond mutual funds attracting fresh capital, the mutual fund sector is poised for its seventh year of net outflows.

The Rise of ETFs

ETFs are gaining popularity due to their lower costs, tax efficiency, and intraday liquidity, making them attractive to both individual investors and professional traders. Ben Johnson from Morningstar highlights the "three C's of ETFs" - cost, convenience, and compatibility - as key drivers behind their growth. ETFs now dominate model portfolios, which are pre-built investment strategies offered by asset managers, further encroaching on mutual funds' market share.

Regulatory Changes and Market Adaptation

The mutual fund industry, despite still managing over $20 trillion in assets, is exploring various strategies to stem the outflow of funds. Notably, around 70 mutual funds have transitioned into ETFs in recent years, with industry giants like Dimensional Fund Advisors and JPMorgan Asset Management leading the charge. Additionally, there's a push for regulatory approval to list ETF share classes of existing mutual funds, aiming to offer more tax-efficient and flexible investment vehicles.

Money Market Funds and SEC Rule Changes

The $6 trillion US money market is also experiencing shifts ahead of new Securities and Exchange Commission (SEC) rules set to take effect later this year. These rules, aimed at making withdrawals more costly during financial stress, are prompting funds to pivot towards government-only holdings or to liquidate. This reallocation is expected to increase demand for government securities, potentially lowering short-term rates and influencing the Federal Reserve's overnight facility usage. Barclays estimates a significant reduction in institutional prime fund balances, with a corresponding increase in government-only fund balances.

Street Views

• Ben Johnson, Morningstar (Neutral on ETFs and mutual funds):

  "The three C’s of ETFs are driving this trend: cost, convenience, and compatibility. ETFs are fundamentally more compatible with the way the advisers are building portfolios today — if they’re even building them themselves. This is manifest most prominently in the growth of model portfolios, where ETFs now represent the majority of assets and the lion’s share of net new flows."

• Jane Edmondson, TMX VettaFi (Bullish on ETFs):

  "No adviser wants to talk to their client about big capital gain distributions at the end of the year. What this closure data says more than anything is that the mutual fund wrapper is on its way out, in favor of more tax-efficient and flexible investment vehicles like ETFs."