ETFs set another record in race to take over mutual funds

The $26.7 trillion mutual fund industry will likely continue to ride on a lucrative wave of fee-based revenue for as long as the bull market lasts, but the smaller and scrappier ETF space is taking significant bites out of the overall asset management space.

As the $7 trillion ETF market closes in on $1 trillion worth of net inflows for 2021, which would nearly double last year’s $504 billion record, the asset managers are also setting records with new fund launches.

This year through Dec. 14, there have been 439 new exchange-traded funds launched, according to CFRA. That compares to 304 ETF launches for all of 2020, and 206 in 2019.

“Record demand in the form of investor assets has encouraged and motivated asset managers to bring new products in 2021,” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

With giants BlackRock Inc. and Vanguard Inc. owning the bulk of the ETF market with low-cost indexed strategies that represent the core of investor portfolios, Rosenbluth said providers are carving niches and creating new markets with actively-managed and thematic strategies.

He cites, for example, the Global X Solar ETF (RAYS) and Global X Wind Energy ETF (WNDY), both of which were launched in September.

Other examples of narrow-themed strategies are the Fidelity Women’s Leadership ETF (FDWM), which launched in June, and First Trust TCW Emerging Markets Debt ETF (EFIX), which launched in February.

Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, describes the trend as both a logical progression of the ETF space and a foreboding sign for the legacy mutual fund industry.

“The flood of ETF launches is just people going to where the fish are biting,” he said, pointing out that the 2021 asset flows into ETFs “will end up around 80% beyond the old annual record and ETF launches will be around 70% beyond the old record.”

Meanwhile, the flip side of the ETF trend is a less talked about tale of a behemoth mutual fund industry growing by about $3 trillion this year alone simply by riding market appreciation, despite $330 billion in net outflows.

Equity mutual funds, alone, representing all the net outflows this year, will still grow by $2 trillion, and continue to collect fees on those assets.

According to Morningstar Inc., there have been 219 new mutual funds launched so far this year, which compares to 205 last year, and 218 in 2019.

“The thing with active mutual funds in general is, as long as the market goes up, the assets increase along with the fees,” said Balchunas. “In any other business they would be closing up shops, but here the market can save your ass. It doesn’t make logical sense. It’s almost anti-capitalist, but percentage of assets is a genius way to get paid.”

Back to the seemingly unstoppable ETF trend, Nate Geraci, president of The ETF Store, said “2021 will be remembered as the year ETF growth went stratospheric.”

“Asset managers of all stripes are finally fully embracing the ETF wrapper, which has shed its label as solely a delivery vehicle for plain-vanilla, index-based exposure,” he said. “The range and depth of ETF strategies launched this year was highly impressive, from traditional active strategies to options-based approaches to thematics.”

Balchunas said creativity is how the ETF space will continue to evolve, while the mutual fund industry finds creative ways to move in that direction through ETF clones and conversions from mutual funds to ETFs.

“These mutual fund CEOs understand that growth will be a problem at some point,” he said. “Just look at the variety of methods they’ve taken to go over to ETFs. It will get crazier and more creative on the themed and targeted ETF side.”