Mutual Fund and ETF Assets Plunge in February, Set to Decline Further in March
March 25, 2020 — Boston
Net flows remain positive, yet mutual fund assets declined 5%, ETFs drop nearly 7%
This issue of The Cerulli Edge—U.S. Monthly Product Trends analyzes mutual fund and exchange-traded fund (ETF) product trends as of February 2020. This issue also includes special coverage on the elimination of non-transaction-fee platforms and the use of asset allocation models. Additionally, this issue features a discussion of February’s market downturn, ramifications of the COVID-19 pandemic, and the winners and losers in the mutual and ETF markets.
Highlights from this research:
- More than $775 billion in assets were wiped out of mutual fund strategies during February, representing a single-month decline of nearly 5%. Despite the losses, both active ($7.4 billion) and passive ($7.8 billion) mutual fund strategies added net flows during February. Taxable bond mutual funds continue to be a destination for investors, having witnessed $55.2 billion in net flows February YTD—the most of any asset class. ETF assets plunged in February, declining nearly 7% to $4.1 trillion. The sharp drop is tied to the fact that most ETF assets (76%) are in equity strategies. Net flows into the vehicle remained positive at $11.5 billion. The taxable bond category has significantly expanded its proportion of the U.S. ETF industry over the last year (17.5% last February) as advisors continued to increase their use of such ETFs. Moving into early March, equity market losses accelerated, ultimately falling more than 20% from all-time highs, ending the 10-year bull market.
- Fears over the economic impact of the COVID-19 outbreak led to significant losses in equity markets during February, with the S&P 500 Index down 8.2% and the MSCI World Index Ex USA down 8.9%. This downward trend will likely intensify during March as the World Health Organization declared a global pandemic and major cities around the world take extreme measures to contain the virus.
- The elimination of non-transaction-fee (NTF) platforms levels the playing field and gives ETF issuers more options for promoting their products. One consequence of the shift from NTF platforms will be the greater use of indirect revenue sharing, such as conference sponsorship and access to advisors for promotional purposes, as opposed to the previously more explicit inclusion in an ETF program. Issuers entering the active ETF market should consider revenue sharing an integral part of their distribution strategy to ensure their products are approved and promoted appropriately.
- Use of asset allocation models is growing as more advisors are being prompted by their home offices to increase consistency of performance, spend more time on holistic wealth management, and focus more on client acquisition. Larger B/Ds and the wirehouses are seeking to bring on asset manager or third-party strategist model providers to help transition more advisors into fee-based business.