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Are Low-Cost Mutual Funds Now Competitive With ETFs?

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For the past three years through 2017, inflows into ETFs have topped inflows into mutual funds, but that trend may be changing, at least for advisor-managed assets.

BNY Mellon’s Pershing, one of the four leading custodians for advisor assets, reports that net flows into mutual funds on the Pershing platform climbed to $8 billion in the first quarter, up 68% from the first quarter of 2017, while net inflows into ETFs fell 14% to $6.2 billion.

And over the 12 months ended March 31, net ETF inflows on the Pershing platform increased 25% over the previous 12 months to $29.5 billion, while net mutual fund inflows were four times greater than the year before, rising to $22.7 billion.

“Mutual fund allocations have made a comeback since the beginning of 2018, largely due to increased volatility in the markets,” said Justin Fay, director of financial solutions, in a statement. “As advisors look to diversify their investment strategies to actively manage against emerging risks in the market, we are starting to see mutual fund inflows close the gap with ETFs.”

The Pershing data is based on 1,400 advisor clients managing $650 billion in mutual fund and ETF assets under custody at the firm.

Advisors are favoring passive low-cost equity mutual funds, primarily institutional shares, which are priced competitively with passive ETFs, as well as actively managed fixed income bond funds, Rich Calvario, director of investment solutions at Pershing, told ThinkAdvisor.

Advisors often prefer actively managed mutual funds to their passive counterparts because the bond market, unlike the stock market, is complicated, according to Matt Forester, the chief investment officer of Lockwood Advisors, an RIA and Pershing affiliate.  Every bond is unique — there are millions of different identifying CUSIP numbers — and its price is determined by a dealers market, not on a public exchange where all shares of a given company, unlike its bonds, trade at the same price at any given time.

Among equity mutual funds on the Pershing platform, inflows into institutional shares are coming “at the expense of other, commission-based share types,” says Calvario. In the 12 months through March 31, more than $10 billion flowed out of A, B, C and retail no-load shares, reports Pershing.

Those flows are indicative of what is happening in the broader fund industry, says Calvario. The ICI reports that institutional mutual fund shares saw inflows of over $400 billion last year, while load funds saw outflows of almost $300 billion.

The fund industry has also been issuing “clean shares,” which have no loads,12b-1 fees or sub-transfer fees that custodians like Pershing receive for the services they provide, such as custody and tax reporting. But those shares, issued in anticipation of the Labor Department’s fiduciary rule, which is now essentially dead as the Securities and Exchange Commission works on its own “best-interest” regulations, are not popular with advisors, according to Pershing.

The firm has added 1,400 triple-zero shares — its name for “clean shares — to its platform, but they constitute less than 2% of the funds they custody, and they are not included on its no-transaction-fee platform.

What is popular with advisors, along with low-cost institutional mutual funds, are ETFs on that platform, known as FundVest ETF.

“It’s not about funds or ETFs, active or passive, but both,” says Fay.

— Check out ETFs Are Influencing Stock Prices and Asset Allocation, Research Finds on ThinkAdvisor.


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