I recently came across an interesting article from Matt Turner over at Business Insider on how Mutual Funds Are Facing Extinction. The gist of the post is that passively managed ETFs are taking over a greater market share from the likes of underperforming actively managed mutual funds.
That’s absolutely true and has been a well-known trend throughout the industry for a decade or more now. However, that doesn’t mean that we are going to see the end of all mutual funds as we know it. In fact, there are many mutual fund companies and managers that are thriving in this environment.
- Vanguard has continued to attract billions this year into its lineup of passive and active mutual funds. They get a ton of press for their ETF flows, but that doesn’t mean investors are sleeping on their mutual fund equivalents either. According to a recent analysis by Morningstar, Vanguard has attracted an estimated $92.8 billion in new assets to its lineup of ETFs and mutual funds on a year-to-date basis.
- Dimensional Fund Advisors is another favorite low-cost mutual fund provider that has added $9.6 billion this year as well.
- American Funds is a well-known mutual fund company that offers a lineup of actively managed funds. They have added $6.2 billion year-to-date according to Morningstar and are now the number two fund company in total assets (surpassing Fidelity).
- DoubleLine Funds is renowned for their actively managed suite of fixed-income mutual funds. Jeffrey Gundlach’s firm has added $7.5 billion in 2016 and looks on pace to surpass $100 billion in total assets this year. We use several of their ETF and mutual fund offerings for clients of our firm.
The more important theme throughout this migration is that investors aren’t abandoning mutual funds completely. They are largely moving towards lower cost funds with a passively managed mandate, or towards active funds with a superior value proposition – i.e. performance, strategy, risk management, etc.
It should also be noted that mutual funds still make up the overwhelming majority of workplace retirement plans such as 401(k)’s. ETFs are starting to make some headway in this arena, but still have a long way to go to displace traditional open ended mutual funds.
Furthermore, some investors still prefer the attributes of a mutual fund versus an ETF simply because of comfort or experience. There is nothing wrong with that mindset as long as you understand what you own and why you own it.
The bottom line is that not all mutual funds are cut from the same cloth and shouldn’t be lumped in as such. There are still some very capable fund managers and investment vehicles that offer a solid investment objective. The problem is deciphering those opportunities from the abundance of stock picking strategies that charge high fees and fail to outperform the benchmark.
Until next time,
David Fabian is a Managing Partner at FMD Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing actively managed growth and income portfolios using ETFs. David regularly contributes his views on wealth management in his company blog, podcasts, and special reports.