More than 20% of mutual funds shuttered over last five years

Nearly a quarter of all stock mutual funds disappeared during the past five years, and competition from index funds could hold the death rate steady in the future.

Standard & Poor’s, in its semi-annual report on the performance of funds vs. their index benchmarks, says 23% of all U.S. and international stock funds have been merged or liquidated in the past five years.

And 17% of all fixed income funds are now clipping coupons in the sky.

Fund companies typically get rid of small, poorly performing funds. “It’s rare that a good fund has no money,” said Todd Rosenbluth, senior director at S&P Global Intelligence. “The funds that are doing well aren’t the ones being shut down.”

Laggard funds don’t help fund-company marketing, either. “A firm will often highlight its overall Morningstar star rating,” Mr. Rosenbluth said. “An underperforming fund will drag that down.”

Most funds are merged into another fund in the family, rather than liquidated. A merger is easier for shareholders, because their money is immediately invested in a similar (and often more successful) fund. Fund companies are happy to dispatch laggard funds because their records disappear, even when merged into another fund.

S&P notes that even when corrected for survivorship bias, the typical actively managed fund fails to beat its appropriate index. As of the end of 2015, 84.15% of large-cap managers, 76.69% of mid-cap managers, and 90.13% of small-cap managers lagged their respective benchmarks, according to a report released Wednesday.

Funds continue to join the Choir Invisible this year. CGM Advisor Targeted Equity Fund, for example, was liquidated on Feb. 17, according to Mutual Fund Observer, a web site. The fund was managed by longtime skipper Kenneth Heebner. So far this year, 61 funds have shuffled off this vale of tears, according to Morningstar.

ETFs aren’t immune from the Grim Reaper, either. The ETF Deathwatch, which lists funds with low assets and trading volume, has 398 candidates at the moment. Many of the newest entrants on the Deathwatch use hedging to differentiate themselves. “The list is definitely growing,” said Ron Rowland, who edits the Deathwatch.

So far this year, eight ETFs and ETNs have been liquidated, Mr. Rowland noted.

That doesn’t include four ALPS ETFs, which the company says will cease to be on March 28. (The funds: ALPS Sector Leaders ETF (SLDR), ALPS Sector Low Volatility ETF (SLOW), ALPS STOXX Europe 600 ETF (STXX) and Global Commodity Equity ETF (CRBQ) Last year, 101 ETFs and ETNs disappeared — one short of the record of 102, set in 2012, Mr. Rowland said.