ETFs continue to grow much faster than Mutual Funds

by Wayne Ferbert on December 4th, 2013

I was doing some research for a presentation I am making at a conference next week - and I thought I would share some of the results because they are interesting.

We advocate on this site REGULARLY for the use of ETFs in your portfolio. And we know they have been a very fast growing product in the financial services space. However, the mutual fund space still dwarfs the ETF space in total size because the mutual fund space is still the domain for actively managed products. The ETF space has not really worked its way in to the actively managed space very well - and it might never.

I analyzed the 100 largest US based ETFs by AUM and compared them to the 100 largest US based Mutual Funds. The results are captured in this chart:
While the largest 100 Mutual Funds represent 3X the total AUM of the 100 largest ETFs - they are not growing at the same pace. The Net inflows to the ETFs have been more than double the size of the net inflows to Mutual Funds in the last 1 year. And they have been about 50% more over the last 3 years.

AND THIS IS DESPITE THE FACT THAT THE ETFS ARE ONLY 1/3rd THE TOTAL AUM OF THE MUTUAL FUNDS! It is an impressive growth story for the little brother of the asset management industry.

In addition, the ETFs, on average, had gross expense ratio of 0.31% compared to the Mutual fund ratio of 0.72%. ETFs are much lower in expense because they are indexes that are usually managed by a computer - not by a guy in a fancy office tower that wears $3000 suits and $600 loafers!

In fact, if you dig down and look at the WEIGHTED AVERAGE expense ratio of the group of 100 funds in each category, the difference is even more significant. The weighted average gross expense ratio is 24 bps for the total of the 100 ETFs while the weighted average for the mutual funds is 69 bps. The difference is even slightly better in the favor of the ETFs.

In the end, the trend in the ETF space is strong - they are taking market share and the Mutual Fund companies know it! 

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