Here's Why More Mutual Funds Are Shifting Assets Into ETFs

J.P. Morgan Asset Management is following the Dimensional Fund Advisors playbook to climb the ranks in the fast-growing ETF space with moves catering to the financial advisory market.

With two Securities and Exchange Commission filings over the past few months to convert $7 billion worth of mutual fund assets into exchange-traded funds, J.P. Morgan will likely become the sixth-largest ETF issuer, overtaking First Trust.

The mutual fund conversion trend, which began with two conversions in 2021 by Guinness Atkinson Asset Management, now includes 103 mutual funds that combine for nearly $170 billion, according to CFRA.

It only takes a glance at the direction of money moving out of mutual funds and into ETFs to appreciate why legacy mutual fund operations are increasing their focus on ETFs.

According to CFRA, 2024 saw $1.1 trillion move into ETFs while mutual funds, excluding money market funds, experienced $579 billion worth of net outflows.

And last year was not an anomaly. In 2023, ETFs took in $585 billion while mutual funds bled $665 billion. And in 2022, $604 billion went into ETFs while $1.1 trillion left mutual funds.

Mutual Funds Converting Toward Advisors

In terms of the conversion trend, Aniket Ullal, CFRA’s Head of ETF Research and Analytics, cites two primary drivers behind the momentum.

“With a conversion, the mutual fund’s performance can be carried over to the new ETF, and that’s a huge advantage to be able to point to a track record,” he said.

The second force is the ability to quickly gain scale in the ETF space where all eyes are on the financial advisory channel as the largest users of ETFs, Ullal said.

Dimensional Fund Advisors is the best example of using conversions to establish a solid ETF footprint. Of the $169 billion worth of mutual fund assets converted since 2021, Dimensional is responsible for $95 billion, more than half.

The next closest ETF issuers in terms of conversion assets are Grayscale and Fidelity with $18 billion each. After that comes J.P. Morgan with $12.6 billion worth of converted assets, not including the conversions in the filing stages.

Of the total converted assets, $140 billion has been from actively managed mutual funds.

The largest conversion is represented by the $33 billion Dimensional Core U.S. Equity 2 ETF (DFAC).

From Ullal’s perspective, the only thing that could slow down the conversion trend is if the SEC were to approve ETF share classes for existing mutual funds, which a few dozen mutual fund issuers have requested, so far.

“The wild card is ETF share classes,” he said. “If you can do it as a share class you don’t need to launch an ETF.”