U.S. money managers couldn’t stop the march toward exchange-traded funds, so they decided to join it instead. Now it’s more like a stampede.
ETFs are on the brink of luring more money in seven months than in any calendar year on record. At $488.5 billion and counting, they’ll likely break the $497 billion full-year record set in 2020 in weeks, possibly days.
Within that surge is a historic capitulation by the mutual fund industry.
Investors have long been migrating to the cheaper, easier-to-trade and more tax-efficient vehicle. Now even the most-storied money managers are launching ETFs in a bid to stay relevant, and some—like Vanguard Group—are handling their clients’ conversions for them.
Almost all of the 25 largest asset managers in the U.S. offer an ETF or plan to do so, according to Bloomberg Intelligence. Capital Group is the biggest without one—and it intends to join the club before long.
“There’s a format change,” said Eric Balchunas, ETF analyst for BI. “In the same way that people went from buying CDs to using streaming or digital music, or from using cabs to Uber.”
ETFs are vehicles that pool investor cash, just like mutual funds. The difference is they trade all day like stocks, and a quirk in the way they operate—swapping assets with an intermediary—helps them to defer tax liabilities.
First created more than 30 years ago, their popularity has surged since the 2008 financial crisis. In the brutal economic fallout, mistrust of money managers grew and investors gravitated to largely passive and transparent ETFs, doubling assets in U.S. funds to $1 trillion by 2010.
History is now repeating, and the Covid crash last year has triggered another dash into ETFs.
Fund assets in the U.S. have jumped to a record $6.6 trillion, up from $3.7 trillion at the height of last year’s selloff. ETFs added $497 billion in new cash in 2020, while mutual funds suffered net withdrawals of $506 billion.
“The stress period we lived through in the first quarter of 2020 further validated not just the ETF structure but the ETF ecosystem in its entirety,” said Ben Johnson, Morningstar’s global director of ETF research. “It gave more investors greater confidence than ever that this is a suitable way to package and deliver not just different market exposures, but different investment strategies.”
This year as in 2020, Vanguard is dominating the leaderboard for ETF flows.
Top of the pile is the $239 billion Vanguard S&P 500 ETF (ticker VOO), which has added $29 billion year-to-date, while the $256 billion Vanguard Total Stock Market ETF (VTI) takes second place with $21.5 billion. BlackRock Inc.’s iShares Core S&P 500 ETF ( IVV) is next with $13.1 billion, then the Vanguard Total Bond Market ETF (BND) with more than $12 billion.
Much of Vanguard’s performance is down to rock-bottom pricing and ubiquity across trading platforms, but it also reflects an internal migration. Assets have been slowly shifting from Vanguard’s mutual funds to its cheaper ETFs. Of its $173.3 billion in U.S. ETF flows through June, about $10 billion was from conversions, a spokesperson said.
This process is easier for Vanguard than for many money managers because the firm’s unusual structure means its ETFs are a share class of its mutual funds. But others on Wall Street are finding a way.
March saw the first official conversion of a U.S. mutual fund to an ETF. The initial switch was made by a tiny firm, but the process has been rapidly scaled up by pioneering quant giant Dimensional Fund Advisors.
The Austin, Texas-based firm with $637 billion under management has already shifted about $29 billion of assets into ETFs, with more planned. The conversions followed its successful launch of three ETFs late last year, which themselves gathered $1 billion in assets in just a few months.