One of the many things I love about Charles Schwab is that, as a publicly traded firm, it provides an amazing window into market trends.
The company is large enough and covers enough of the market—both retail investors and advisors—that it can serve as a legitimate proxy for the market as a whole.
Schwab just filed its new Monthly Activity Highlight and the data are a doozy. While Schwab doesn't comment on it in the release, a close look at the data shows unequivocally: The mutual fund is dead and the ETF is ascendant.
Look at net inflows by Schwab customers into mutual funds and ETFs by month over the past year. (These numbers are all in millions of dollars.)
Charles Schwab is a firm that leads the market in no-load mutual funds. It earned $839 million last year from its lucrative Mutual Fund OneSource program. And yet, ETFs outpolled mutual funds for net inflows 130-to-1 last year among its customers.
We have seen this story before. Over the past six years, ETFs have pulled in more than $1 trillion in net inflows while mutual funds haven't managed to attract $200 million. But going 130-for-1 over a 12-month period at Charles Schwab is extraordinary.
Really A Passive Story
Part of this is an active versus passive story, more so than an ETF versus mutual fund story. According to Morningstar, passively managed funds (including ETFs) pulled in $484 billion in net new money over the past year, while actively managed funds (almost exclusively mutual funds) lost $97 billion in flows. But ETFs are becoming the vehicle of choice for passive investors, and as I see it, the Morningstar data largely validate Schwab's information.
In other highlights from the past year, ETFs have:
- Surpassed hedge funds on an AUM basis globally
- Topped mutual funds as the product of choice by financial advisors for the first time
- Gained significant traction from institutional investors
A year and a half ago, FactSet's vice president of ETFs, Dave Nadig, and I predicted that ETF assets would surpass mutual funds within 10 years. So far, assets have tracked our prediction with amazing fidelity.
But with more and more data like this coming out, I'm starting to wonder if Dave and I weren't a little bit conservative in our prediction.
Contact Matt Hougan at [email protected].