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ETFs Are Hot; Mutual Funds Are Not: Morningstar

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2020 was a very good year for ETFs but not for mutual funds. ETFs had net inflows of $502 billion, led by taxable-bond ETFs, which collected nearly half those assets, while mutual funds saw outflows of $289 billion, according to Morningstar’s latest fund flows report, which tracks both ETFs and mutual funds. 

That divergence in flows is nothing new. ETF flows have topped mutual fund flows in eight of the past 10 years, but the gap in 2020 was the biggest ever, according to Ben Johnson, director of global exchange-traded fund research at Morningstar.

(Related: ETFs, Mutual Funds Moving in Different Directions)

The growing popularity of ETFs positions them to overtake mutual funds in assets, writes John Rekenthaler, Morningstar’s vice president of research. It “won’t happen anytime soon, because mutual funds possess the power of history,” he writes — mutual funds have  $18.2 trillion in assets compared with $5.5 trillion in ETFs — “but the outcome appears inevitable.”

ETFs and mutual funds recovered from the beating they took in March when the coronavirus pandemic hit, trashing markets along with the U.S. economy in terms of flows and performance, but the comeback was uneven, especially among equity funds.

Equity mutual funds suffered record net outflows of $370 billion in 2020 — double the previous record of $180 billion in outflows in 2019 and the seventh consecutive year of net outflows despite a 16% gain in the S&P 500. U.S. equity ETFs, in contrast, collected $129 billion in 2020, marking their fifth consecutive year of inflows above $125 billion.

Advisors are more likely to use ETFs now instead of mutual funds, writes Rekenthaler, for several reasons: they don’t carry charge extra charges like loads or 12b-1 fees, are more transparent about their holdings, more liquid since they can be traded throughout the day and less prone to post capital gains, which are taxable.

(Related: 4 ETF Predictions for 2021)

ETFs have become so popular that traditional mutual fund companies like Dimensional Fund Advisors are launching them for the first time; others like Capital Group are planning to do the same. Some of these launches are brand new; others are conversions or clones of existing mutual funds.

The Explosive Growth of ARK Investment Management

In December 2020, four of the 10 funds with the largest inflows were ETFs and three of the four were from ARK Investment Management, home of five of the best-performing ETFs in 2020, which more than doubled in price. In the first two weeks of January, flows into ARK ETFs topped flows into BlackRock’s iShares ETFs. 

“The growth of ARK ETF Trust is nothing short of impressive,” according to the Morningstar fund flows report. “With its calendar-year inflows of $20.6 billion and strong gains for its ETFs’ holdings, the firm grew 11-fold during the year to $34.5 billion as 2020 closed from $3.1 billion in total assets at the end of 2019.”

Most and Least Popular Fund Families

iShares placed second in fund flows for all of 2020, collecting $122.12 billion, according to the Morningstar total for combined ETF and mutual fund flows. Vanguard, as usual, led inflows with $140.62 billion and J.P. Morgan placed third, with $40.4 billion. State Street Global Advisors, home of the first ETF, the SPDR S&P 500 SPY, placed fourth, with $356.2 billion.

Among the top 10 fund families that experienced the biggest outflows were DFA (-$37 billion), T. Rowe Price (-$33.3 billion), Franklin Templeton (-$25.2 billion) and Invesco (-$31.3 billion), which may explain why all four have been launching ETFs. 

Two of them launched ETFs for the first time in 2020 – DFA and T. Rowe Price. The T. Rowe Price and Invesco ETFs launches in 2020 were nontransparent funds that don’t disclose their holdings on a daily basis, as most ETFs do.

Bond Fund Asset Flows 

2020 was not only a banner year for asset flows into ETFs but also for flows into bond funds — both ETFs and mutual funds.

Taxable and muni bond funds combined collected $496.8 billion in assets for the year while U.S., international and sector equity funds saw outflows of $248.1 billion, according to Morningstar.  Taxable bond ETFs and mutual funds collected a record $441 billion in flows, topping 2019′s $396 billion.

— Check out ARK’s Cathie Wood: Big Shift From Bonds to Stocks Is Coming on ThinkAdvisor.

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