Record $1.5 Trillion Rift Opens Between Mutual Fund, ETF Flows

Investors are spurning mutual funds at a record clip, driving a $1.5 trillion gap in the flow of money from the old-school investment vehicles and into ever-popular ETFs.

The divide this year between the two investment types widened to an all-time high, up from $950 billion in 2021, according to data compiled by Bloomberg Intelligence. The growing disparity is one measure of the speed with which ETFs are eating into the market dominance of mutual funds.

The tide has been shifting for years in an embrace of ETFs’ easier-to-trade and tax-friendly structure. But the market turmoil and a fixed-income rout amid aggressive Federal Reserve rate hikes in 2022 further accelerated the divide as investors elected to make faster moving bets in exchange-traded funds over their staid brethren.

“Bonds having their first major bear market in over 40 years has resulted in a colossal industry-altering move from mutual funds to ETFs,” according to Todd Sohn at Strategas Securities.

“It’s been a development really two years in the making, going back to the Fed buying fixed-income ETFs in 2020, and then the rise of inflation and a tighter Fed resulting in a major bear market for bonds,” the ETF strategist said.

Mutual funds saw investors pull $480 billion out of fixed income, the first yearly outflow for the asset class since 2015. At the same time, ETFs have raked in bond investments of $184 billion as of Dec. 15, less than the over $200 billion seen in the prior two years.