ETF Launches Dwarf Mutual Fund Starts

Morningstar data show active ETFs dominating issuance this year.

With every new calculation of exchange traded versus mutual fund launches, the shift to ETFs has become more apparent, underscoring investors preference for products that offer lower fees, tax advantages and user friendliness.

According to the latest data from Morningstar, 236 new ETFs debuted this year through June 20 compared to 155 over the same period last year and dwarfing the 95 mutual funds that started. Of the total launches, 166 fit into the actively managed category, underscoring the ETF wrapper’s edge over mutual funds.

“Nearly all of the largest asset managers are now fully embracing the ETF wrapper and finally offering-up their flagship investment strategies and top portfolio managers in the vehicle investors are demanding,” said Nate Geraci, president of The ETF Store in Overland Park, Kans.

The Morningstar report comes as ETFs seem headed for a record year in starts, and investment pours into the funds. Earlier this month, the author of a report by Boston-based SSGA on flows said that including a second half bump that usually occurs, ETFs could generate $890 billion in flows, their second highest total ever. 

Read More: After Big May, ETFs Headed for 2nd Best Year Ever

The report found that issuers had debuted 25 actively managed ETFs and 16 passively managed funds in the U.S. equity category, compared to just two active and one passive mutual fund in this category. 

The fastest growing area of ETF launches this year has been alternative strategies, represented by 64 new ETFs, compared to just one new alternative strategy mutual fund launch.

“Other key drivers behind this year’s surge in new launches include defined outcome ETFs, leveraged and inverse single-stock ETF offerings, and crypto-related ETFs,” Geraci said. “I expect the boom to continue in the second half of the year, particularly in the single-stock ETF category where there are a boatload of SEC filings.”

A joint venture between Rex Shares and Tuttle Capital Management is filed with the Securities and Exchange Commission to introduce 44 single-stock ETFs, half of which are leveraged long and half of which will offer inverse exposure to the underlying stocks.

Read More: Tuttle/Rex Files to Launch 44 Single-Stock ETFs

Record ETF Starts in 2024?

Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, said that while he wouldn’t be surprised to see total ETF launches this year setting a new high, the single-stock ETF and buffer strategies that relaunch quarterly might be slightly skewing the counts.

“Those two elements have put ETF launches over a normal pace, but the reality is a lot of old guard mutual fund companies have finally surrendered to ETFs and are launching their own,” he said.

Along those lines, Balchunas highlighted that ETF industry giants like BlackRock Inc., Vanguard Group and State Street Global Advisors are not driving a lot of new issuances lately.

“The core area of cheap beta is pretty much had,” he said. “Chronic innovation is where we’re at right now and I think we’ll be there for a while.”

Jen Wing, head of investment solutions at GeoWealth in Chicago, said the ETF has become too tempting for investors and issuers to ignore.

“Investors are increasingly favoring ETFs over mutual funds due to their generally low fees, ease of use, and tax efficiency. In turn, asset managers are concentrating on expanding their ETF line up, converting mutual funds into ETFs, and launching new ETF products,” she said.

Wing attributes the fast-growing appeal of ETFs over mutual funds to two key factors.

“First, the surge in ETF launches has created a wide variety of tools for building portfolios, enabling what we call an active approach to passive investing,” she said. “Just as we once marveled at the multitude of smartphone apps for every need, we now see a similar trend with ETFs.”

The bigger factor, Wing added, is “the distinction between mutual funds and ETFs has evolved.” “While mutual funds were traditionally associated with active management and ETFs with passive management, this dynamic is changing,” she said.