Trending
Advisors that actively stay abreast of fund industry trends are likely that one of the big movements on that front has been the spate of mutual fund to exchange traded funds in recent years.
What started as a ripple at low tide is now reaching surf-worthy swell proportions. Those conversions are equivalent to fund industry Darwinism. Either evolve with the times or risk being nothing more than a footnote in investing history.
That is to say MF-to-ETF conversions are partially driven by survival. Since the U.S. ETF industry was born in 1993, $5 trillion has departed actively managed mutual funds. If $5 trillion was the GDP of a country, that nation would be ahead of Japan as the third-largest economy in the world. That’s massive amount of cash and one that represented a hard lesson for some fund companies. Fortunately, it’s not too late for then to join the ETF party and there are strong reasons to consider doing so.
ETF Conversions Pay Off
In some instances, there are doubts about the asset-gathering acumen of former mutual funds turned new ETFs, but the fact remains this is a shift many legacy mutual fund issuers are embracing the pace of such conversions will likely ramp up as 2025 draws. The following from Bank of America confirms the MF-to-ETF move can help issuers regain lost assets and then some.
“So far, 121 active mutual funds have become active ETFs. Two years before converting, the average fund saw $150mn in outflows,” according to a new report from the bank. “After converting, the average fund gained $500mn of inflows.”
What’s truly notable about the above data is that those inflows aren’t based on performance. Investors put money to work with newly converted ETFs regardless of whether or not those funds are beating their benchmarks. From that, it’s not a stretch to infer that some market participants, including advisors, would simply rather own an ETF than a mutual fund.
Another interesting element regarding ETF conversions is that it’s one of the rare examples of everyone benefiting. End users get superior tax efficiency and lower fees while issuers gain an avenue for remaining relevant, potentially regaining lost mutual fund assets and surprisingly decent economic despite lower fees.
“Conversions also seem attractive for investors: the ETF structure offers big tax savings (1.20%/year in lower costs; $250bn saved so far) and greater transparency and liquidity,” adds Bank of America. “Conversions also work for fund issuers: the average convert earns 45bps more in fees than a typical ETF, and 20bps more than other active ETFs. Even after expense ratio reductions, typical fund economics are above breakeven within 12 months of converting.”
Expect More ETF Conversions
It’s likely that as the year unfolds, other interesting trends in the fund industry will emerge, but it’s also safe to say that ETF conversions will remain front-and-center. As BofA notes, active mutual funds currently holding a combined $3 billion in assets are planning to shift to the ETF structure next year.
That might not sound like a large amount of money, but that’s what’s already been filed for, indicating that as 2025 moves along, more conversions could be in the offing. Issuers have a slew of funds from which to choose when mulling the move to ETFs.
There are still more than 7,000 mutual funds on the market and while not all make more credible conversion candidates, BofA estimates at least 400 could make that move.