2022 market turmoil has accelerated years-long shift toward easier-to-trade, tax-efficient fund structure
The gap between mutual funds and more popular ETFs has widened into a record as investors flee the traditional investment structures at a breakneck pace.
According to statistics gathered by Bloomberg Intelligence, the inflow gap between the two investment categories has grown to an all-time high.
The discrepancy in fund flows, which speaks to the speed at which ETFs are eroding mutual funds’ market dominance, has accelerated from US$950 billion in 2021 to US$1.5 trillion this year.
ETFs' simpler-to-trade and tax-friendly structure, a popular feature among investors, has driven a years-long transition in the fund space. That dynamic has quickened as investors came to prefer faster-moving ETF positions over mutual fund exposure amid 2022’s market unrest and fixed-income rout driven by aggressive Fed rate hikes.
“Bonds having their first major bear market in over 40 years has resulted in a colossal industry-altering move from mutual funds to ETFs,” Todd Sohn at Strategas Securities told Bloomberg News.
The ETF strategist added, “It’s been a development really two years in the making, going back to the Fed buying fixed-income ETFs in 2020, and then the rise of inflation and a tighter Fed resulting in a major bear market for bonds.”
For the first time since 2015, mutual funds saw investors withdraw US$480 billion from fixed income. Still, ETFs had only received US$184 billion in bond investments as of December 15, down from the nearly US$200 billion received over the previous two years.
Money managers have been under pressure to find hedges elsewhere due to the exceptional year for stocks and bonds, where both markets declined in almost complete lockstep. This is because of rising inflation and tighter monetary policy, which increased yields.
Sohn believed that this might have motivated investors to hold more bonds.
“There are investors out there who need to re-up their weight to fixed income given the decline and so using ETFs is another route to do that,” Sohn said.
According to Bloomberg Intelligence data, ETFs have been growing across the board, bringing in close to US$588 billion so far this year and on track for their second-best ever annual harvest.
During this time, mutual funds have experienced the largest cash outflow on record, totaling around US$950 billion.
Approximately 28% of all US fund assets are now made up of ETF investments, up from 20% five years ago, according to Bloomberg Intelligence data.
Tax-loss harvesting, which allows investors to lock in mutual fund losses and use them to offset capital gains tax, has been a compounding factor in this year’s rush away from mutual funds.
