The inflationary tremors shaking Wall Street all year are causing big changes to fixed-income capital flows that could ultimately end up disrupting the money-management industry over the long haul.

Years after ETFs triggered a multi-trillion-dollar revolution in stock trading, bond investors are playing catch-up -- liquidating cash from mutual funds and loading up on exchange-traded strategies at an unprecedented rate.

As cross-asset volatility breaks out with echoes of the pandemic tumult, traders are going all-in on the famously cheap and easy-to-trade products in order to navigate the great 2022 bear market.

Unlike mutual funds, which price only once per day at the market close, ETFs behave like a stock and can change hands throughout the session -- an unrivaled trading advantage when Federal Reserve-induced gyrations rock global markets all day long.

“The Fed meets and tells the world at 2 p.m. what they’re going to do,” Sean Collins, chief economist at the Investment Company Institute, said in a phone interview. “With an ETF, you can respond immediately. With a mutual fund, you can respond at 4 o’clock.”

If the trend intensifies, expect loud noises from industry critics who fear ETFs are already creating liquidity and systemic risks -- including distortions in the very assets they track, from stocks to corporate bonds.

An ETF fee war also threatens to rage anew as the likes of BlackRock Inc. and State Street Corp. battle for market share -- broadening retail access to complex and risky debt trades on the cheap.

Another reason why the mutual-fund-for-ETF switcheroo matters: If the trend endures, passive strategies, historically the dominant approach in ETFs, may boom in popularity -- amping up criticism that the industry is reducing price discovery in modern markets.

But how did we get here? Until now, the stickier nature of bond investments and the entrenched role of mutual funds in the pension industry effectively capped the allocation shift.

But this year, as the Fed’s battle against the highest inflation in four decades drives up cross-asset turmoil, more than $446 billion has been withdrawn from US fixed-income mutual funds, a record exodus in ICI data. About $154 billion has poured into bond ETFs instead, per the ICI -- even as nearly every fund posts a loss.

Much of that influx to ETFs has gone to short-dated, cash-like products, and that may reflect a key difference between the type of investor using each structure.

Mutual funds tend to be popular with buy-and-hold savers making long-term decisions for retirement portfolios, Collins said. It’s that breed of investor who may have been most spooked by the losses, and who likely isn’t too fussed with the ability to trade multiple times per day.

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