It’s over for mutual funds—finished, done.
Well, not quite, but nearly half of advisors surveyed plan to increase exchange-traded fund use and 32 percent plan to increase allocations to passive investment products in preparation for a new regulatory environment.
While in theory it’s never supposed to be an either-or argument with a 40 Act mutual fund vs. ETF use in the portfolio, research powerhouse Cerulli Associates found advisors believe that lower-cost investment products translate to less business risk. The shift to passive reached a new plateau during 2016, with flows of more than $500 billion. These inflows come at the expense of massive outflows from active funds—totaling $310 billion.
Mutual fund assets experienced modest growth in 2016, increasing roughly 6 percent to $12.5 trillion, but the rate of growth overall continued to decrease and annual flows were net negative, losing $90.8 billion.
ETFs displayed another successful year in 2016, as assets jumped 3.4 percent in November and another 3.5 percent in December, contributing to a total growth rate of 20 percent. Flows were a major component, as the vehicle amassed $287.3 billion during 2016.
Cerulli found in many aspects of its research last year that the search for attractive risk-adjusted returns from non-correlated sources of alpha will only intensify.
Some institutional investors are beginning to question their portfolios’ passive equity beta exposures after an extended period of upward momentum from larger stocks that drive the overall markets as well as relatively low equity market volatility.
Legendary low-fee advocate John Bogle recently provided his take on the future of mutual funds, at least from an active standpoint.
“The active managers have a philosophy they can win,” the Vanguard founder said. “They come into the office every day and say, ‘Boy, Mark, I’m going to beat the heck out of you today,’ and they don’t. When they have a bad year, they say it’s that year; I’ll do it next year. It’s a hard business and it’s not the expense ratios that have to be cut, but also the trading. The transaction costs are very high–they’re hidden; they’re not going to tell you what they are—they are there and they are large.”