ETFs on Track to Outnumber Mutual Funds Early Next Year

Like Labubus and tinned fish, ETFs are very in style. 

Launches are breaking records and issuers are increasingly introducing ETF versions of existing strategies: As of Oct. 8, there are 194 converted ETFs, 142 ETF clones and 50 exchange-traded funds as a share class on the market, according to data from Morningstar. With roughly 5,718 ETFs and 6,202 mutual funds currently, the number of ETFs is expected to overtake the number of mutual funds for the first time in February 2027, said Ben Johnson, head of client solutions at Morningstar. It’s just the latest evidence that mutual funds have become a legacy product, with investors putting $9.6 trillion to work in markets via ETFs over the past 25 years, during which time mutual funds saw $319 billion in outflows. 

The preference for the ETF wrapper is clearest in the case of ETF clones, Johnson said. The Fidelity Total Bond Fund’s ETF clone saw $27.6 billion in net new flows over the five-year period ending Sept. 30, for example, while the mutual fund gathered $11.2 billion in net flows over that same span.

“As a very tax-focused practice, I’ve always used ETFs to avoid realizing capital gains on rebalancing,” said Robert Persichitte of Delagify Financial. “Now, with more choices in the ETF space, it feels like a no-brainer for me.” 

Low-Cost, Tax Efficient and Here to Stay

Unlike the viral elf plush toys, ETFs don’t appear to be going anywhere: 

• As advisors have moved toward index-based investing, ETFs have increasingly been used more than mutual funds. And advisors who found a need for alpha could still reduce client costs by using an actively managed ETF over a mutual fund, said Greg Welborn, principal at First Financial Consulting. 
• Gregory Furer of Beratung Advisors said that his firm is rapidly adopting ETF versions of mutual funds in taxable accounts. “Moving to the ETF structure lets [clients] take more control over when they realize capital gains, which fits directly into the tax planning work we do,” he added. 

Tax Troubles. But just because an advisor may prefer the ETF structure doesn’t necessarily mean it makes sense to liquidate mutual fund holdings, particularly when doing so could trigger a significant taxable event, said Brittany Christensen, senior vice president and head of business development at Tidal Financial Group. “We expect the transition to happen much more naturally through new allocations, portfolio rebalancing and tax-efficient opportunities to migrate existing assets.”