In spite of this year’s volatile market and economic downturn, U.S. ETFs have drawn in nearly $500 billion from new clients, reports an article in the Financial Times. Though that’s far below the $935 billion brought in last year, it’s on track to beat the previous record of $501 billion set in 2020. Meanwhile, long-term mutual funds in the U.S. have lost $790 billion so far this year, a much steeper decline than 2021 and 2020, which lost $59 billion and $484 billion, respectively.
The money pouring into ETFs indicates a massive shift in how investors are allocating their capital, the article contends. ETFs offer the chance to trade funds on the exchanges the way equities are traded, but have lower fees and more tax advantages, making them much more appealing to investors. That’s fueled the push into ETFs, even in the current downturn, and signaled that ETFs have come more into the mainstream. Some analysts are pointing to this year’s outsized performance as proof that ETF growth doesn’t need a “risk-on” climate. Ju-Hon Kwek of McKinsey outlined the three phases of ETFs for the Financial Times: first, they provided an inexpensive way to copy the returns from the overall market in a more accessible way than actively-managed funds. Then, they shifted from broad strategies into complex approaches, making them more appealing to institutions. Now ETFs are in a third phase, where more and more managers are opening actively-managed ETFs. These funds have “come of age” this year, Kwek said, who also noted an obvious pattern of outflows from mutual funds this year, followed soon after by inflows into ETFs with a similar focus. Kwek blamed that pattern on retail investors selling off their underwater mutual funds in order to avoid capital gains taxes—an action known as “tax loss harvesting.” Those investors then put the proceeds of those sales into ETFs, which are more tax-friendly. In addition, more ETFs are being used by financial advisors in their model portfolios, generating the shift from mutual funds, Shelly Antoniewicz of ICI told the Times, adding that ETF inflows are likely to beat what we saw in 2020.