ETFs Win as Active Managers Poised for ‘Worst Year’ on Record

Exchange-traded funds are poised for growth as passively managed funds continue to lure investors, setting up the worst year on record for actively managed counterparts.

ETFs have notched nearly $607 billion in inflows this year, on pace for the second-best year of inflows to date, after their $920 billion haul in 2021. Mutual funds shed over $950 billion as of mid-December, trumping the $13 billion that exited last year and marking the greatest outflows the investment vehicle has seen, according to Bloomberg data as of Dec. 16.  

“Active managers are on pace for their worst year that we've seen, so some of that is going to bleed through to the investment vehicle breakout,” said Adam Sabban, senior research analyst at Morningstar Research. “ETFs will tend to look better when passive does much better than active." 

Source: Morningstar Direct

Passively managed funds—those that track indexes without management from a financial professional—are returning to favor as investors shy away from more expensive, active funds, according to a recent note from Goldman Sachs Group Inc. analysts. There are currently 2,074 passive ETFs in the U.S. market, according to ETF.com data.  

“Flows into passive products remain above average though have slowed in recent months,” Goldman Sachs researchers said in a Nov. 22 note, adding that 55% of assets under management from ETFs and mutual funds is passively managed as of the end of October.   

A recent study of actively managed mutual funds from S&P Dow Jones Indices also showed that no actively managed funds outperformed the market regularly over the last five years, and that index funds have generally yielded better returns.  

The data is the latest indicator of ETFs chipping away at the market share of mutual funds, so much so that issuers are now starting to update their legacy products. Almost 40 mutual funds with nearly $62 billion in assets have been converted to ETFs so far this year, according to Bloomberg data. 

“I think it's probably safe to say that the market’s favoritism towards ETFs does not appear to be abating; neither is its demand for passive funds versus active,” Sabban said. “As long those two trends exist, you just have an inherent advantage of ETFs over mutual funds.”  

Contact Shubham Saharan at [email protected]