Investors Favored ETFs vs. Mutual Funds in First Half of 2023

Investors Favored ETFs vs. Mutual Funds in First Half of 2023

Investors also switched to passive from active funds, showed renewed confidence in stocks.

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Reviewed by: Lisa Barr
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Edited by: Ron Day

Investors favored ETFs over traditional mutual funds—and passive management over active—in the first half of the year, according to a study by Cerulli Associates. 
 
Investors pulled $178 billion from traditional mutual funds, excluding money market funds, in this year’s first six months. That was far less than the roughly $400 billion in outflows in the same period last year, the Boston-based researcher said.  

At the same time, more than $200 billion went into exchange-traded funds, a steep drop from the approximately $300 billion that flowed in during last year’s first half.  

The report confirms investors are continuing to move money into ETFs from mutual funds to take advantage of exchange-traded funds’ tax efficiency and ease of trading. The trend of investors moving funds from poorly performing and expensive actively managed funds into cheaper index funds also kept pace. 

The survey highlighted another point: Investors were moving money back into U.S. stock funds in June after shying away from them for most of the first half, in possible display of confidence that the current rally may continue. 

ETFs vs. Mutual Funds

Despite making up only 5% of overall ETF assets, active ETFs raked in $47 billion during the first half of the year, or 20% of all ETF flows. Active mutual funds, by contrast, had $223 billion in outflows, showing that while active management is breaking into the ETF space, investors continue to switch to passively managed ETFs. 

These trends are a continuation of last year’s first half, when active mutual funds were hit by $451 billion in outflows, while active ETFs took in $44 billion. 

This was reflected in the list of best- and worst-performing ETF issuers by flows. Active-ETF-focused ARK Investment Management led the list of most outflows for June, while index fund pioneer Vanguard Group had the highest inflows. 

Despite the broad trend of investors moving toward cheaper funds, the report also found that 30% of investors didn’t know how much they were paying in fees. Investors who responded with a number also likely overestimated their fees. The average response was 0.76%, substantially higher than the 0.61% average for nonindex mutual funds and the 0.07% average for index funds.  

Investors Move Back to Stocks 

Another major trend mentioned in the report was a return to U.S. equities. Investors, wary after the pounding markets took in 2022, spent much of the first half of 2023 avoiding U.S. stock ETFs.  

After having slight outflows in the first quarter, and taking in $23 billion in April and May, inflows surged to $41 billion in June. 

 
Contact Gabe Alpert at [email protected]             

Gabe Alpert is a former data reporter at etf.com with over seven years’ experience in financial journalism. He also previously contributed reporting and analysis to Barron’s Magazine, Investopedia and other publications.