The Flow Show: ETFs are on the brink of luring more money in seven months than in any calendar year on record

Report from Bloomberg. . .Within that surge is a historic capitulation by the mutual fund industry. ETFs are vehicles that pool investor cash, just like mutual funds. The difference is they trade all day like stocks, and a quirk in the way they operate — swapping assets with an intermediary — helps them to defer tax liabilities.

First created more than 30 years ago, their popularity has surged since the 2008 financial crisis. In the brutal economic fallout, mistrust of money managers grew and investors gravitated to largely passive and transparent ETFs, doubling assets in U.S. funds to $1 trillion by 2010. History is now repeating, and the Covid crash last year has triggered another dash into ETFs >

FLASH FORWARD

> ". . .A trio of money managers — BlackRock, Vanguard and State Street Corp. — account for roughly 80% of the market, and thanks to the boom, they now control vast chunks of Corporate America.

Big Three

BlackRock, Vanguard and State Street make up majority of ETF industry

Source: Bloomberg

This “Big Three” collectively own about 22% of the typical S&P 500 company, according to Bloomberg data, up from 13.5% in 2008. That’s drawing the attention of regulators and raising concerns about what such dominance means for everything from corporate governance to how markets function.

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There are no guarantees the annual ETF flow record will be broken, of course. The second-half of 2021 could sour, and all that new cash could run for the exits. But history suggests it’s unlikely.

The Big Take

Wall Street Has Surrendered to the $500 Billion ETF Rush

Vanguard leads the way as industry prepares to shatter annual record with months to go

By 

Claire Ballentine

 and 

Francesca Maglione

July 14, 2021, 9:01 PM MST Updated on July 15, 2021, 1:01 AM MST

U.S. money managers couldn’t stop the march toward exchange-traded funds, so they decided to join it instead. Now it’s more like a stampede.

More 

Fund assets in the U.S. have jumped to a record $6.6 trillion, up from $3.7 trillion at the height of last year’s selloff. ETFs added $497 billion in new cash in 2020, while mutual funds suffered net withdrawals of $506 billion.

Battle for Assets

ETFs beat out mutual funds for inflows in recent years

Source: Bloomberg

“The stress period we lived through in the first quarter of 2020 further validated not just the ETF structure but the ETF ecosystem in its entirety,” said Ben Johnson, Morningstar’s global director of ETF research. “It gave more investors greater confidence than ever that this is a suitable way to package and deliver not just different market exposures, but different investment strategies.”

ETFs have collectively lost money only two months in the past three years. Even then, outflows are often relatively mild. As the world economy ground to a halt because of the pandemic in March last year and global stock markets crumpled, $357 billion was pulled from U.S. mutual funds. For ETFs, it was more like $17 billion.

“ETFs are an easy button of sorts that you can hit to get exposure to any number of different segments of the market, which draws from a much broader investor base than mutual funds ever had,” said Morningstar’s Johnson