Mutual Fund Strategies Increasingly Launch as ETFs, Transforming Investor Options

Asset managers are rapidly expanding their mutual fund strategies into exchange-traded funds (ETFs), aiming to capitalize on ETFs’ surging popularity and provide more tax-efficient and lower-cost options for retail investors. The trend, highlighted by new SEC approvals and record investor inflows, marks a significant shift in how traditional fund managers approach product offerings.

According to Morningstar, 56 mutual funds were converted to ETFs in 2024, up sharply from just 15 in 2021, with another 40 conversions so far this year. In addition to conversions, many firms have introduced ETF “clones” of existing mutual funds, allowing investors to choose between the two formats. Over 80 asset managers have also sought approval from the Securities and Exchange Commission to introduce ETF share classes within their existing mutual fund portfolios—a strategy that would let ETFs and mutual funds share the same underlying assets.

Monitor showing a financial chart | Source: Pexels

“This is one of the biggest trends in the fund market right now,” said Bryan Armour, director of ETF and passive strategies research for North America at Morningstar. “Over the next two years, we’d expect a large number of ETF share classes to be used heavily.” The SEC approved the first such application, from Dimensional Fund Advisors, on Sept. 29.

Investor demand underscores the shift: U.S. ETFs drew a record $1.1 trillion in inflows in 2024, while mutual funds saw $388 billion in withdrawals, Morningstar reported. ETFs’ rise is attributed to their transparency, lower fees, and tax efficiency. “ETFs have become so much more prominent in the market,” Armour said. “At a high level, asset managers are trying to capitalize on demand.”