ETF Conversions Draw $500M in New Money: BofA Study

Mutual funds that convert to ETF structures attract an average of $500 million in new money within two years of conversion, reversing previous outflows, according to a recent Bank of America Global Research report.

The analysis found that in the two years before converting, these funds typically experienced $150 million in outflows. The dramatic shift demonstrates how the ETF wrapper can breathe new life into struggling mutual fund strategies.

For asset managers facing persistent mutual fund outflows, the findings suggest ETF conversions could offer a viable path forward.

Since 2019, when regulatory changes made conversions possible, 121 mutual funds representing $125 billion in assets have made the switch, according to the BofA report.

The trend has accelerated as managers seek to stem the tide of outflows from actively managed mutual funds, which have seen a $5 trillion exit since the creation of ETFs in 1993, the report reveals. A similar amount has flowed into passively managed equity ETFs during that period.

This shift in investor preference has pushed managers to adapt, with ETF conversions emerging as a key strategy to retain assets. The study shows that even underperforming managers who convert to ETFs saw average monthly inflows of 1.3% post-conversion, highlighting how the ETF structure itself can attract new investment.

Converting to Capture Growth

The conversions span various investment approaches, with different strategies seeing particular success. Options-focused funds, thematic ETFs and active fixed-income products have attracted strong interest after conversion, according to the study.

The ETF structure provides clear benefits for investors, including greater tax efficiency that saves an average of 1.2% annually compared to mutual funds, the report found. For a $100,000 investment in an S&P 500 strategy made in Oct. 2023, the ETF version would have grown to $359,000 versus $316,000 for the mutual fund equivalent.

Bank of America identified 425 mutual funds managing $325 billion that could be strong candidates for conversion, with many experiencing outflows despite solid performance.

The pace for conversions has grown nearly 2.5 times since 2021, with seven more conversions totaling $3 billion in assets planned through 2025, according to the report.

The researchers found the ideal conversion candidates typically manage $2 billion or less, offer differentiated strategies that outperform benchmarks, and have expense ratios similar to existing active ETFs, according to the report. These conversions are particularly attractive in market segments with less competition from existing ETFs.