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.
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.