In June alone, investors had withdrawn nearly $22 billion from actively-managed mutual funds in the United States. This is the biggest withdrawal since October 2008, which was the period in the middle of financial markets collapse. Meanwhile, the municipal bond funds were the exception as they attracted over $6 billion.
This money is flowing to passively-managed Exchange-Traded Funds (EFTs). With these investment vehicles, the managers seek to mimic specific indices rather than pick stocks. The benefit of ETFs is due to their much lower costs than those of mutual funds.
Per Bloomberg, the shift to these passive funds will continue and the investment management industry is likely to suffer because of lower fees. Not only profit margins are decreasing, but the very survival of many of these asset managers is threatened.
Larry Fink, BlackRock’s CEO, thinks this shift will lead to consolidation in the industry. Blackrock is one of the leaders when it comes to index-based funds. Its iShares ETFs continue to attract investors’ money. The other leader, Vanguard, is also doing well.
Over many years, the active investment management industry has failed to deliver results. After accounting for various fees and charges, many of these mutual funds have underperformed the markets. As a result, investors began to transfer their money to ETFs. These funds trade like stocks on the exchanges and are highly liquid. There’s also a wide range of ETFs, covering various asset classes and countries. So the options to invest are many.