What's Happening?
Asset managers are increasingly converting mutual fund strategies into exchange-traded funds (ETFs) to leverage the growing popularity of ETFs among investors. According to Morningstar data, 56 mutual funds were
converted to ETFs in 2024, with an additional 40 conversions occurring this year. This trend is driven by the advantages ETFs offer, such as tax efficiency and lower fees, which appeal to retail investors. Additionally, over 80 asset managers have sought permission from the Securities and Exchange Commission (SEC) to launch ETF share classes of their existing mutual fund portfolios. The SEC approved the first application for Dimensional Fund Advisors on September 29, 2025. This shift reflects a broader trend in the fund market, with ETFs gaining a larger market share compared to mutual funds.
Why It's Important?
The transition from mutual funds to ETFs is significant for the investment industry as it reflects changing investor preferences and the evolving landscape of financial products. ETFs offer several benefits over mutual funds, including tax efficiency and transparency, which make them attractive to retail investors. This shift could lead to increased competition among asset managers to offer more ETF options, potentially driving down costs and improving product offerings. For investors, the growing availability of ETFs provides more options for portfolio diversification and cost-effective investment strategies. The trend also highlights the need for financial advisors to adapt their strategies to meet the changing demands of their clients.
What's Next?
As more asset managers seek SEC approval for ETF share classes, the market is likely to see a continued increase in the number of ETFs available to investors. This could lead to further innovation in the types of ETFs offered, as well as increased competition among asset managers to capture market share. Investors may need to evaluate their portfolios to determine whether ETFs or mutual funds better align with their financial goals and tax situations. Additionally, the financial advisory industry may need to adjust its recommendations and strategies to accommodate the growing preference for ETFs among clients.
