Are ETFs Killing Retail Mutual Funds?
By Max Rottersman -
Most people I talk to in the fund industry believe small mutual fund companies will find it difficult to survive. Instead of large mutual fund families like Fidelity and American Funds, it may be the ETFs that kill them.
Since most sales into mutual funds originate from 401(k) plans and the like, comparing ETFs to large fund complexes is misleading. ETFs are clearly a retail product (at this time). I therefore created a subset of mutual fund companies that do not sell through the retirement channel. In the chart below I compare these "retail mutual funds" with ETFs. Both data-sets have about a half a trillion in assets. The maroon line represesents all mutual funds, with assets north of $11 trillion.
Since September, retail funds have lost 6% of their assets. All mutual funds remained relatively flat (1% increase) whereas ETFs grew by 4%.
In the next chart, we look at percentage change in assets. ETFs show more volatility. This is to be expected in a product designed to be sold on exchanges. What is worrisome for small funds is the five month trends of declining assets.
In the next chart we look at net sales. This is the important metric for fund companies. Net sales are calculated by removing the performance from asset changes.
Monthly new sales are interesting, but they exhibit too much variation to be statistically useful. Six-month and yearly figures are needed to gage persistent trends in sales. Nonetheless, retail new sales are anemic.
To stay in business, will independent mutual funds become creators of new active ETFs? In any case, the data points to the growth of ETFs at the small funds' expense.
Max Rottersman is an Industry Consultant. He can be reached at 603-617-2025
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