In this article, we’ll look at what’s driving the growth in ETF assets and what it means for the larger market.
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What’s Driving the Growth?
These trends have been happening for a long time. For example, in 2020, ETFs represented just 1.5% of aggregate U.S. investment company assets, a figure that surpassed 20% in 2021. Meanwhile, over the past 20 years, ETFs have grown at a 24% annual clip compared to just 7% for mutual funds, suggesting a shift in market preferences.
Not surprisingly, many asset managers have converted mutual funds into ETFs to stay ahead of the curve. These funds have brought about $40 billion in assets from mutual funds to ETFs over the past two years. But after successfully testing the waters, the floodgates could open over the next five years, shifting far more assets over the divide.
Net Benefit for Investors
In many ways, asset management fees are moving in the same direction as trading commissions. While zero-commission trades took a while to take off, the introduction of lower costs eventually forced even the most prominent brokers to lower their commissions. Asset management fees could follow a similar path, with ETFs capturing more market share.
Mixed Picture for Managers
A new proposal from the SEC could also increase costs for some mutual funds by changing open-end fund liquidity rules. If that happens, more asset managers could decide to convert their mutual funds into ETFs. However, they may also have to lower their expenses to compete in the new lower-cost market.
The Bottom Line
Ultimately, the success of mutual fund to ETF conversions depends on the asset manager and shareholders. For instance, Dimensional Funds converted about $30 billion worth of mutual funds into active ETFs and saw a $9 billion increase in assets under management last year. And JPMorgan has had similar successes converting a portion of its funds.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.