(Bloomberg) — Mutual funds are being extinguished at a faster pace than new launches as trillions of dollars continue to flow out of products in favor of exchange-traded vehicles.
While 95 new mutual funds have debuted this year, 123 have already closed, according to Morningstar Inc. data. until Monday. If the trend continues, it will be the ninth consecutive year of net closures, with more than 1,100 funds liquidated during this period.
Mutual funds have shrunk in terms of numbers and assets as investors increasingly embrace lower-cost, tax-efficient ETFs, which are valued for avoiding taxable capital gains. This has made ETFs popular with individuals and professional traders, with the latter attracted to the intraday liquidity of the structure. Meanwhile, the growth of ETFs within model portfolios — Off-the-shelf investment strategies created by asset managers and investment platforms for financial advisors — are also stealing share from mutual funds.
“The three Cs of ETFs are driving this trend: cost, convenience and compliance,” said Ben Johnson, head of client solutions at Morningstar. “ETFs are inherently more compatible with how advisors are building portfolios today — if they even build them themselves. This is most evident in the growth of model portfolios, with ETFs now representing the majority of assets and the majority of net new flows.”
Nearly $114 billion has flowed out of mutual funds so far in 2024, while ETFs have absorbed roughly $258 billion, Investment Company Institute data compiled by Bloomberg show. While bond mutual funds have managed to attract cash in 2024, the overall industry is on track for a seventh consecutive year of exits.
To be fair, mutual funds have a strong incumbent advantage in that the US pension system and 401(k) are built to include the envelope. And with more than $20 trillion in assets, the mutual fund industry is still an order of magnitude larger than the $9 trillion ETF market.
However, the outflow of funds has caused asset managers to exhaust all avenues to stem the tide for their mutual fund formations. There were about 70 mutual funds converted in ETFs over the past few years, led by advisors such as Dimensional Fund Advisors, JPMorgan Asset Management and Fidelity Investments. Meanwhile, several issuers and at least one exchange have asked the Securities and Exchange Commission for permission to list ETFs. divide the classes of their existing mutual funds.
“No adviser wants to talk to their client about big year-end capital gains distributions,” said Jane Edmondson, head of thematic strategy at TMX VettaFi. “What these closing data say more than anything is that the mutual fund envelope is on the way out, in favor of more efficient and tax-flexible investment vehicles like ETFs.”