The U.S. ETF industry has grown from less than $2 trillion to about $7 trillion over the past decade. While that’s impressive growth, JPMorgan Chase & Co.’s asset managers believe that figure will double to $15 trillion by 2028. And even more surprisingly, they believe 10% to 20% of that figure—or $1.5 trillion to $3 trillion—could be in active funds.
In this article, we’ll look at what’s driving the growth in ETF assets and what it means for the larger market.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
What’s Driving the Growth?
Asset managers launched 430 new ETFs last year despite the dismal performance of stock and bond markets. While early ETFs focused on low-cost indexing, actively-managed ETFs have become much more popular over the past few years. For instance, JPMorgan’s Equity Premium Income Fund (JEPI) drew in nearly $13 billion in 2022 alone.
These trends have been happening for a long time. For example, in 2020, ETFs represented just 1.5% of aggregate U.S. investment company assets, a figure that surpassed 20% in 2021. Meanwhile, over the past 20 years, ETFs have grown at a 24% annual clip compared to just 7% for mutual funds, suggesting a shift in market preferences.
Not surprisingly, many asset managers have converted mutual funds into ETFs to stay ahead of the curve. These funds have brought about $40 billion in assets from mutual funds to ETFs over the past two years. But after successfully testing the waters, the floodgates could open over the next five years, shifting far more assets over the divide.
Net Benefit for Investors
ETF growth is a net benefit for investors because it will help lower fees and increase transparency. Unlike mutual funds, most ETFs (except for semi-transparent ETFs or ANTs) must disclose their holdings daily. And generally, ETF expense ratios are lower than mutual funds, particularly when it comes to actively-managed funds.
In many ways, asset management fees are moving in the same direction as trading commissions. While zero-commission trades took a while to take off, the introduction of lower costs eventually forced even the most prominent brokers to lower their commissions. Asset management fees could follow a similar path, with ETFs capturing more market share.
Mixed Picture for Managers
The picture is a little less rosy for asset managers. While ETF conversions can help increase assets under management and ensure a competitive edge in the future, they also lower a fund’s income from expenses. Moreover, more than one-third of converted funds posted net outflows since they made the switch, according to Bloomberg.
A new proposal from the SEC could also increase costs for some mutual funds by changing open-end fund liquidity rules. If that happens, more asset managers could decide to convert their mutual funds into ETFs. However, they may also have to lower their expenses to compete in the new lower-cost market.
The Bottom Line
JPMorgan believes the ETF industry will see an acceleration in growth over the next five years. Under the surface, mutual fund conversions may account for most of these gains, providing investors with more access to lower-cost, actively-managed ETFs. However, some asset managers could suffer from the disruption.
Ultimately, the success of mutual fund to ETF conversions depends on the asset manager and shareholders. For instance, Dimensional Funds converted about $30 billion worth of mutual funds into active ETFs and saw a $9 billion increase in assets under management last year. And JPMorgan has had similar successes converting a portion of its funds.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.
