Why Legacy Asset Managers Must Embrace ETFs Right Now
The emergence of ETFs might have been easy to shrug off 30 years ago, but they're impossible to ignore today.
As momentum goes, nothing is quite like the steady transition away from mutual funds and toward exchange-traded funds, and that trend is becoming increasingly obvious as a raft of legacy asset management shops have recently joined the ETF ranks.
Over the past week, no fewer than five well-established asset managers have launched or filed to launch their first exchange-traded funds. This eclectic compilation of ETF newbies includes the likes 175-year-old Lazard Asset Management, 63-year-old broker-dealer Raymond James, and 43-year-old Thornburg Investment Management.
Perhaps even more significant is last month’s ETF debut by mutual fund pioneer MFS Investment Management, which seemed to downplay the timing of entering the ETF space 100 years after it introduced the first-ever mutual fund in the U.S.
Legacy Fund Shops Migrate to the Future
Seeing more than $1 trillion move into ETFs last year while nearly $600 billion flowed out of mutual funds is surely a factor driving asset managers toward ETFs. But even that stat doesn't signify a new trend.
According to data compiled by CFRA, in 2023, ETFs took in $585 billion while mutual funds lost $665 billion. In 2022, meanwhile, ETFs took in $604 billion while mutual funds bled $1.1 trillion.
Against that backdrop, one can’t help but wonder why some legacy asset managers waited so long to make the transition to ETFs, or if a time may come when it's too late to try.
ETFs Are Here to Stay
Obviously, we’re talking about large and complex operations that can’t be expected to turn on a dime, but this month marks the 32nd birthday of the first exchange-traded fund, the SPDR S&P 500 ETF Trust (SPY).
The emergence of ETFs might have been easy to shrug off 30 years ago, but they're impossible to ignore today.
For at least three-dozen mutual fund companies, hopes are still pinned to some degree to an ETF share class that would be bolted onto an existing mutual fund. However, the Securities and Exchange Comission is not on the clock regarding ETF share classes and there's no indication that the regulator is making them a priority.
When mutual fund companies and legacy asset managers are asked what took them so long to enter the ETF space, the responses are generally along the lines of wanting to give investors and clients options. To that, one can’t help but wonder which investors are simply choosing the more expensive, less liquid, and less transparent option.
Clearly, the mutual fund industry has a solid stronghold in the 401(k) market, but it's difficult to imagine that structure holding much longer. And once that door opens to ETFs or anything more user-friendly than mutual funds, it could be game over.
