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The Changing Face Of ETFs
Active asset managers increasingly see ETFs as a way to keep their customers .
By Jeff Schlegel
WHAT THE HECK IS GOING ON with exchange-traded funds ? Inflows into ETFs this year are on pace to fall short of last year ’ s total , which in turn was smaller than the prior year ’ s total . It wasn ’ t long ago that ETF asset growth seemed poised to conquer the world . Now it seems the momentum has stalled .
But that doesn ’ t mean the ETF industry is in retreat . The key takeaway is that money is still flowing into the space , particularly into active ETFs , at the expense of mutual funds — a business that continues to bleed assets . The diminution of the mutual fund space could give rise to the next wave of ETF growth , now that more asset managers are figuring out which way the wind is blowing and beginning to package their actively managed mutual fund strategies in ETF wrappers .
As for the investment scene this year , a lot of investors hunkered down after getting burned in 2022 and played defense by sitting on cash in low-yielding accounts . But as interest rates kept rising and people realized they could earn 5 % interest in cash , they went on offense by pouring their idle money — or transferring some of their existing investments — into money market funds that paid the higher rates . So in a year when cash is king , ETFs have been relegated to the status of minor royalty , relatively speaking .
“ That ’ s one of the primary reasons why ETFs flows are lower this year ,” says Aniket Ullal , head of ETF data and analytics at CFRA .
Let ’ s look at the numbers : As of this year ’ s third quarter there were 3,398 U . S . -listed ETFs with total assets of $ 7.2 trillion , according to Morningstar Direct . Those figures include exchange-traded notes , but these play such a small role that they don ’ t really influence the overall numbers , says Dan Sotiroff , a senior manager research analyst at Morningstar Research Services .
Net inflows into ETFs through this year ’ s third quarter were $ 326.6 billion , down nearly 19 % from the inflows during the first three quarters of last year . Meanwhile , net outflows from open-end mutual funds were $ 283 billion as of the end of September ( that ’ s an improvement from the nearly $ 597 billion in outflows during the same period last year ).
Meanwhile , inflows into money market funds this year were $ 792 billion through the third quarter , according to the Investment Company Institute . During the same period last year they experienced outflows of nearly $ 198 billion .
As for where the excitement has been in ETFs this year , Ullal says that fixed income has accounted for about 40 % of flows even though this asset class accounts for just 20 % of ETFs in terms of both products and assets . “ Within that , there has been a lot of interest in Treasury and sovereign bond ETFs ,”
46 | FINANCIAL ADVISOR MAGAZINE | DECEMBER 2023 WWW . FA-MAG . COM