The investment landscape is undergoing a seismic shift as asset managers increasingly convert traditional mutual funds into exchange-traded funds (ETFs).
According to a Bank of America (BofA) study, 121 US funds, collectively worth $125 billion, have transitioned in the last five years, reaping benefits such as higher inflows and better market positioning. This trend signals a strategic move for active managers facing outflows amidst the growing popularity of passive investments.
Mutual Funds vs. ETFs: What’s Driving the Change?
Traditional mutual funds have struggled to compete with the transparency, liquidity, and cost efficiency of ETFs. While investors have pulled out a net $5.5 trillion from active equity mutual funds since 1993, ETFs have attracted $4.5 trillion in inflows. The advantages of ETFs include:
- Transparency: Daily disclosure of holdings.
- Liquidity: Easier to trade on exchanges.
- Tax Efficiency: Minimizes taxable capital gains.
- Lower Fees: Average post-conversion expense ratio drops from 90 to 60 basis points.
Impact of Conversions on Asset Managers
BofA’s research highlights that converting mutual funds into ETFs results in significant benefits:
- Pre-conversion: Average outflows of $150 million over two years.
- Post-conversion: Average inflows of $500 million within the same period.
Mutual Fund-to-ETF Conversions Overview
| Metrics | Pre-Conversion (Avg.) | Post-Conversion (Avg.) |
|---|---|---|
| Net Flows (2 Years) | -$150M | +$500M |
| Expense Ratio (Basis Points) | 90 | 60 |
| Time to Revenue Positivity | N/A | ~12 Months |
Success Stories and Cautionary Notes
While the majority of conversions yield positive results, a significant portion of inflows has been concentrated in a few cases. Dimensional Fund Advisors, for example, accounted for $32 billion of the $35 billion inflows among converted funds.
Note: Active ETFs captured nearly 28% of net inflows in 2024, indicating growing market acceptance but also highlighting the competitive pressures in the ETF space.
What Lies Ahead?
BofA’s analysis identifies over 400 mutual funds experiencing outflows despite strong returns. These funds are prime candidates for conversion. However, challenges remain, particularly for funds integrated into 401(k) plans, where ETFs lack infrastructure compatibility.
Disclaimer: The information in this article is based on market research and expert opinions. Investments are subject to market risks. Please consult a financial advisor before making decisions.
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