Episode 80, Jeff Ptak, CFA, major trends in the mutual fund and ETF industry, host Rick Ferri
Mar 27, 2025
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Jeff Ptak, a managing director at Morningstar Research Services, discusses the shifting landscape of the mutual fund and ETF industries. He highlights the remarkable growth of actively managed ETFs and the declining popularity of traditional mutual funds. The conversation delves into the complexities of thematic ETFs, revealing their investor appeal despite performance fluctuations. Ptak also addresses the risks associated with leveraged ETFs and emphasizes the importance of strategic portfolio management to combat investor inertia.
The rise of actively managed ETFs reflects a significant shift in investor preferences, contrasting with the decline of traditional actively managed mutual funds.
Many traditional mutual funds are transitioning to ETF structures to adapt to market dynamics and meet changing investor demands.
Despite initial hype, thematic ETFs have underperformed compared to simpler strategies, highlighting the risks of chasing investment trends over proven methods.
Deep dives
Growth of Actively Managed ETFs
The mutual fund industry is experiencing significant changes, particularly with the rise of actively managed ETFs, which are gaining popularity despite the overall contraction of actively managed mutual funds. In the last three years, approximately 1,700 new ETFs have emerged, showcasing a vibrant sector that is expanding both in asset management and product offerings. Conversely, around 4,400 traditional open-end mutual funds have been closed during the same period, indicating a shift in investor preferences towards more flexible ETF structures. This trend highlights a stark contrast between the growth of passive investing and the struggles of traditional active mutual funds, illustrating a promising future for actively managed ETFs.
Transition from Open-End Funds to ETFs
Many traditional open-end funds are transitioning into ETF structures as fund managers seek to adapt to changing investor demands and market dynamics. Hundreds of funds have undergone conversion to ETFs, reflecting a strategic move among asset managers aiming to capitalize on the growing preference for ETFs over traditional funds. Notably, large firms like Dimensional and JP Morgan have successfully converted significant mutual funds into ETF formats, allowing them to maintain robust asset levels. However, this conversion requires careful consideration of various factors, such as investor logistics and fund structure, making it a selective process for asset managers.
Rise and Fall of Thematic Funds
Thematic funds have gained traction in the ETF market, with a peak of 57 new thematic ETFs launched in 2021, though recent data shows a slowdown, with only 17 thematic ETFs launched in the last year. Investors have found that while thematic strategies generated buzz and interest, the actual performance has often lagged behind simpler investment options, such as traditional index funds. Research indicated that dollars invested in thematic strategies underperformed substantially compared to broad market options, which may discourage future investment in these niche segments. Despite their popularity, the lagging average returns underscore the risks associated with chasing trends rather than adhering to proven investment strategies.
Challenges of Leveraged ETFs
Leveraged ETFs, particularly those targeting single stocks, have become increasingly popular, drawing the attention of investors primarily interested in short-term trading opportunities. These products promise amplified returns, but it is crucial for investors to recognize the heightened volatility associated with them. Studies revealed that holding leveraged ETFs for extended periods typically resulted in disappointing returns compared to non-leveraged underlying assets due to compounding effects of volatility. The SEC has warned investors about the inherent risks, pointing towards the need for diligence when considering these complex financial products, especially for long-term investors.
Performance Dilemmas in Active Versus Passive Funds
Recent studies reveal a significant disparity in the success rates of active and passive funds, with a marked tendency for actively managed funds to underperform their passive counterparts over longer time horizons. For example, only about 6% of active U.S. large blend funds outperformed their passive benchmarks over a ten-year period, indicating the profound challenges faced by active management strategies. While some active bond funds demonstrate more favorable success rates, the overall trend shows that most investors would achieve better outcomes by choosing passive investments. As many active funds continue to close, the landscape reflects a broader shift towards indexing as a more reliable investment strategy for long-term wealth generation.
Jeff Ptak, CFA, is the managing director for Morningstar Research Services. Prior to that, he held positions as the chief ratings officer, head of global manager research, and president and chief investment officer of Morningstar Investment Services. In this episode, we discuss major new trends affecting the mutual fund and exchange-traded fund (ETF) industries, with a special focus on the exponential growth of actively managed ETFs.
Rick Ferri, CFA, a long-time Boglehead and investment adviser, hosts the Bogleheads on Investing podcast.The Bogleheads are a group of like-minded individual investors who follow the general investment and business beliefs of John C. Bogle, founder and former CEO of the Vanguard Group. It is a conflict-free community where individual investors reach out and provide education, assistance, and relevant information to other investors of all experience levels at no cost. The organization supports a free forum at Bogleheads.org, and the wiki site is Bogleheads® wiki.
Since 2000, the Bogleheads have held national conferences in major cities nationwide. Many local Chapters in the US and even a few foreign chapters meet regularly, and New Chapters are added regularly. All Bogleheads activities are coordinated by volunteers who contribute their time and talent.
This podcast is supported by the John C. Bogle Center for Financial Literacy, a non-profit organization approved by the IRS as a 501(c)(3) public charity on February 6, 2012. Your tax-deductible donation to the Bogle Center is appreciated.
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