(Bloomberg) -- Mutual funds are being extinguished at a faster pace than new launches as trillions of dollars continue to drain from the products in favor of exchange-traded vehicles.
While 95 new mutual funds have debuted this year, 123 have already shuttered, according to Morningstar Inc. data through Monday. If the trend continues, it would be the ninth straight year of net closures, with more than 1,100 funds liquidating over that span.
Mutual funds have been shrinking in terms of numbers and assets as investors increasingly embrace lower-cost, tax-efficient ETFs, which are valued for deflecting taxable capital gains. That’s made ETFs popular with individuals and professional traders alike, with the latter drawn to the structure’s intraday liquidity. Meanwhile, the growth of ETFs inside model portfolios — off-the-shelf investment strategies created by asset managers and investment platforms for financial advisers — is stealing share from mutual funds as well.
“The three C’s of ETFs are driving this trend: cost, convenience, and compatibility,” said Ben Johnson, head of client solutions at Morningstar. “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.”
Nearly $114 billion has exited 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 fresh cash in 2024, the overall industry is on track for a seventh straight year of outflows.
To be fair, mutual funds have a powerful incumbency advantage in that the US retirement system and 401(k)s are built to incorporate the wrapper. 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.
Still, the outflow of funds has asset managers exhausting all avenues to stem the tide for their mutual fund lineups. Roughly 70 mutual funds have been converted into ETFs over the past few years, lead by the likes of Dimensional Fund Advisors, JPMorgan Asset Management and Fidelity Investments. Meanwhile, several issuers and at least one stock exchange have asked the Securities and Exchange Commission for permission to list ETF share classes of their existing mutual funds.
“No adviser wants to talk to their client about big capital gain distributions at the end of the year,” said Jane Edmondson, head of thematic strategy at TMX VettaFi. “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.”
