The 2022 Investment Showdown: ETFs vs. Mutual Funds
The ETF wrapper makes ETFs an attractive investment vehicle and has been the clear choice for fund managers over mutual funds in 2022.
The ETF space is on track for its second-best year of flows in 2022. Net inflows totaled $856.16 billion last year behind the $1.29 trillion collected in 2021, according to London-based research firm ETFGI.[1] Besides 2022 being a year characterized by inflation, rising interest rates, and significant investment losses across assets, ETFs stayed on the winning side of fund flows.
Mutual Funds: A Dying Investment Vehicle?
ETFs and mutual funds have many similarities, however, with attractive tax advantages, trading flexibility, and potentially lower management fees, it’s no surprise ETFs have grown in popularity and market share in recent years compared to their mutual fund counterparts.
The amount of mutual funds converting to ETFs continues to gain traction with fund managers with no signs of slowing down. In 2021, the ETF space gained over $37 billion in assets from 16 mutual fund conversions.[2] And in 2022, 38 mutual funds with nearly $62 billion in assets were converted to ETFs, according to Bloomberg data.
ETFs: The Vehicle of Choice?
The disruptive growth of ETFs has leading asset managers wondering if their clients could benefit from the reduced costs of ETFs.
Top Reasons ETFs Have an Edge Over Mutual Funds
- It’s Easier
Since the SEC’s adoption of the "ETF Rule” in 2019, Rule (6c-11) allows ETFs to be launched without requiring exemptive relief if funds meet certain conditions such as publishing disclosures and daily holdings. - Lower fees
ETFs are known for their low expense ratios, which are typically much lower than those of mutual funds. This can make a significant difference over the long term, as high fees can eat into your returns. - Greater tax efficiency
ETFs are generally more tax-efficient than mutual funds, as they tend to generate fewer capital gains. This can be especially beneficial for investors in higher tax brackets, or for those who are planning to hold their investments for a long time. - Increased flexibility
ETFs can be bought and sold throughout the day, just like stocks. This means that you have more control over when you buy and sell and can more easily adjust your portfolio in response to changing market conditions.
Overall, 2022 was a successful year for ETFs, with many top performers delivering impressive returns for investors. Whether you're looking for broad-based exposure to the stock market or more targeted investments in specific sectors, ETFs can provide a cost-effective and tax-efficient way to reach your investment goals.
If you are looking to enter the ETF space and migrate your mutual fund assets, contact ETC to discuss if a conversion is right for your strategy.
[1] ETFGI – 2022 global ETFs and ETPs industry landscape insights report, 1/12/23
[2] Sourced from NYSE Arca, NASDAQ, CBOE, as of 1/12/23
