Are ETFs Sounding a Death Knell for Mutual Funds?

The Vanguard Group, the world’s biggest mutual fund company, hasn’t been terribly active launching those funds over the past few years.

It last issued a stand-alone mutual fund—one that’s not part of a specific investment package—in November 2023. 

Like most other asset managers, it has been busier with another product, the exchange-traded fund. Over that same period, Vanguard issued 11 ETFs, according to Morningstar data. Its flagship, the $657.3 billion Vanguard S&P 500 ETF (VOO), this year became the world's biggest. 

This is one example among many of how exchange-traded funds have arrived at the gates of the mutual fund fortress and are knocking hard on the door.  

ETFs and Mutual Funds Compete

The $11 trillion U.S. ETF industry has grown rapidly and now has more than half of the assets of the $19.8 trillion mutual fund industry. Thanks to a variety of factors, from structural differences to rapid innovation to clever marketing, ETFs are closing the gap with their larger and older brethren.

“Mutual funds are clearly giving up market share to ETFs,” said Daniel Sotiroff, CFA, Morningstar Direct senior manager research analyst. “There’s no sign of it slowing down. I wouldn’t be surprised if ETFs become the dominant vehicle of choice.”

In the three years between 2022 and 2024, $1.9 trillion has been pulled from mutual funds, Morningstar reports. So far this year, investors have yanked $255.9 billion from the funds.

The story is the opposite with ETFs, with $2.3 trillion in inflows in the three years leading up to the end of 2024 and $348.4 billion flowing in through April of this year.

ETF Space Active

The ETF space is also far more active as issuers create new varieties of funds, including leveraged, quantum computing and cryptocurrency vehicles. 

Through April of this year, about 350 ETFs were launched, according to FactSet data provided to etf.com. That’s 10 times the 34 mutual funds that hit the market over the same period, according to Morningstar. Last year, 754 new ETFs hit the market while 154 mutual funds were launched, according to Morningstar. Investors also poured more than $1 trillion into ETFs for the first time in 2024.

Mutual Funds Fade

The age of the mutual fund—and its primacy as the investment vehicle that offers access to broad swaths of stock and bond markets—is fading. The ETF, birthed in the U.S. in 1993 about 70 years after the first mutual fund, is fast becoming the choice for investors who want low-cost exposure to indexes like the S&P 500, segments such as retail, banks or semiconductors, a variety of bonds or just about any portion of the market.

ETFs, for one thing, trade more easily than mutual funds, which, because of their structure, calculate net asset values at the end of the trading day. The advantage perhaps most frequently cited is that they don’t trigger capital gains tax events when traded in a taxable account because of the way shares in the fund are bought and sold.

“They have some features that allow them to trade throughout the day that makes them more appealing,” Sotiroff said.

Financial professionals who responded to an etf.com inquiry say both investing vehicles pluses and minuses so that cases can be made for either depending on the situation.

The choice between ETFs and mutual funds is not an "either/or" but depends on the specific client situation, account type, investment goals, and the particular strategy being implemented," Marcos Segrera, Wealth Manager and Principal at Evensky & Katz/Foldes Wealth Management in Coral Gables, Florida. "Both structures will continue to play vital roles in diversified investment portfolios."

Will Mutual Funds Disappear?

Does the ascendance of ETFs spell the end for mutual funds? Most likely, no. U.S. investors can still choose from 6,583 mutual funds as tracked by Morningstar (In the U.S., 4,363 ETFs trade, according to etf.com’s screener tool.)

Mutual funds retain a few benefits that make them a preferred tool over ETFs in some cases. For example, ETFs can’t be closed off to new investors, unlike mutual funds.

“If you’re an active manager and have a certain amount of money that you can manage before your edge or your advantage starts to erode, you’re probably going to want to shut the gate and say, ‘Hey, we’re fine. We’re not going to take in any more money’,” Sotiroff said.  

Primecap is an example of a company that manages billions of dollars in closed-end mutual funds. Sotiroff said their funds have performed “very, very well.”

"Mutual funds and ETFs each play distinct roles in portfolios and serve different client needs," said a spokesperson for BlackRock Inc. (BLK), itself among the world's biggest mutual fund issuers and the No. 1 ETF company. BlackRock issued five mutual funds in the second half of 2024.

Symbiotic Relationship

With $6.8 trillion spread around 333 mutual funds, including the Vanguard Total Stock Market Index Fund, the world's largest, Vanguard says it remains committed to the asset. Still, it acknowledges surging interest in ETFs. 

"We’re building out our lineup of ETFs to ensure that investors have the tools they need to construct broadly diversified portfolios for their long-term investing needs," a spokesperson said in an emailed comment.

Mutual funds and ETFs may coexist together for some time—maybe in the same way humans and neanderthals lived side by side in Europe thousands of years ago. 

Humans, as far as we can tell, won that evolutionary battle. But not before interbreeding with neanderthals, and some humans today carry neanderthal genes that help them survive. Perhaps one of the fund types will wither away, after cross-pollinating its rival and helping secure its future.