ETFs (Exchange Traded Funds), as a convenient investment tool, are becoming increasingly popular among investors. Over the past decade, their asset size has significantly increased in the US market, with a growth rate significantly exceeding that of traditional mutual funds. This not only reflects the demand of investors for more flexible, efficient, and low-cost investment tools, but also reflects the reality that actively managed funds in the US market find it difficult to outperform the market.
According to Morningstar data, the growth rate of ETF assets in the top ten fund companies in the United States that own both products is three times that of mutual funds. As of the end of 2023, the total assets of open-ended mutual funds managed by these fund companies were $12.01 trillion, an increase of 114% from ten years ago. During the same period, ETF assets soared by 376%, with a total asset value of $7.29 trillion.
The overall performance of the US ETF market is also remarkable, with its asset size growing fourfold in 10 years, reaching $8.16 trillion. In contrast, the asset size of mutual funds only increased by 71% during the same period, to $21.02 trillion. Over the past 10 years, investors have invested huge amounts of money into ETF products, totaling over $4.4 trillion, while mutual funds have lost $950.8 billion during the same period.
The advantages of ETFs lie in their flexibility, tax efficiency, and lower costs. Analysts say that the expansion of the ETF market is due to several key factors.
Firstly, the trend of transitioning from mutual funds to ETFs is constantly increasing, and the inflow of funds from new entrants and independent funds has promoted the growth of the ETF market. Many traditional fund companies have also begun to transform and launch ETF products. For example, the US Capital Group launched its first ETF in February 2022.
According to data from Morningstar, as of the end of 2023, the ETF products of multiple fund management companies have significantly increased due to the inflow of new funds. For example, the ETF launched by Deming Trust Fund attracted a net inflow of $31 billion in 2023, and its asset size increased to $118 billion as a result.
Another advantage of ETFs is their more tax efficient nature compared to mutual funds. This is due to the product structure of ETFs, where investors trade ETFs on exchanges rather than buying and selling on a daily net asset basis like mutual funds. In addition, the physical redemption process of ETFs greatly reduces the capital gains tax burden borne by investors, which is very attractive for investors pursuing tax efficiency.
According to analysis by Xinda Securities, in addition to the product characteristics of ETFs, there are also many external factors. The improvement of the efficiency of the US capital market and the intensification of competition in the asset management market have jointly promoted the development of ETFs. By the end of 2021, the proportion of active stock selection funds in the United States outperforming their corresponding indices in annualized returns over 3 and 10 years is less than 50%. Due to over half of US equity funds being unable to outperform the S&P 500 index, the difficulty of actively managing funds to outperform the market continues to increase.
In addition, the sensitivity of funds to costs is constantly increasing, and low costs have become the key to the rise of passive funds. With the improvement of market efficiency, low rate passive funds, such as index funds and ETFs, have attracted a large amount of capital inflows.