Andrew Ross Sorkin
Asset managers across the United States are accelerating a shift that has been reshaping the investment landscape: turning more of their long-standing mutual fund strategies into exchange-traded funds, or ETFs. This trend reflects a broader industry move to meet rising investor demand, benefit from the tremendous popularity of ETFs in recent years, and offer retail clients more accessible and efficient investment options.
For decades, mutual funds dominated mainstream investing. But as investor preferences evolve, many large firms are reassessing how they package their products. The result has been a rapid expansion in ETF offerings tied to pre-existing mutual fund strategies, and market observers believe this momentum is only beginning.
Transformations in fund structures
Asset managers have taken several paths to bring their mutual fund strategies into the ETF world. One increasingly common method has been direct conversion: turning an existing mutual fund into an ETF. According to Morningstar, 56 mutual funds completed such conversions in 2024, a significant jump from just 15 in 2021. An additional 40 funds have already made the switch this year, underscoring the accelerating pace of change.
Another popular approach involves launching an ETF “mirror” or “clone” of a mutual fund strategy. In this case, investors can select either the mutual fund version or the ETF alternative, depending on their needs. This structure appeals to investors who prefer the tax efficiency and intraday trading flexibility of ETFs without giving up access to strategies historically available only through mutual funds.
A third model is generating particular industry excitement: the development of ETF share classes within existing mutual funds. More than 80 firms have applied for regulatory permission to create this structure, according to Bryan Armour, director of ETF and passive strategies research for North America at Morningstar. Instead of forming a separate investment product, the ETF would simply become a new share class of the existing mutual fund, sharing the same underlying portfolio.
This concept represents a hybrid approach to product design — keeping the mutual fund intact while offering the same investment strategy in ETF form. Armour notes that it is one of the most significant shifts underway in the asset management industry and anticipates that ETF share classes will gain substantial market adoption over the next two years.
The Securities and Exchange Commission approved the first application for this structure on September 29, giving Dimensional Fund Advisors the green light to move forward. Additional approvals are widely expected, though recent government procedural delays have temporarily slowed the review timeline.
Why ETFs are winning investor attention
While mutual funds and ETFs are similar in that they both bundle a mix of stocks, bonds, and other securities managed by professionals, investors are demonstrating a strong preference for ETFs. The appeal largely stems from structural advantages that many financial professionals believe make ETFs a better fit for many individual investors.
In 2024, investors poured an unprecedented $1.1 trillion into U.S. ETFs, according to Morningstar — a record inflow. By contrast, U.S. mutual funds saw investors pull out approximately $388 billion during the same period. Although mutual funds still command a larger overall share of the U.S. investment market, ETFs have steadily gained ground for two decades, rising from just 5% of total market share in 2004 to around one-third today.
Advisors point to several core factors driving this shift. ETFs are typically more tax-efficient, helping investors avoid unexpected capital gains taxes that sometimes accompany mutual fund ownership. Fees are also often lower for ETFs, making them attractive for long-term investors focused on cost management.
Transparency is another key advantage. ETF managers must disclose their holdings daily, giving investors continuous insight into fund positions. Mutual funds generally release their holdings monthly or quarterly, offering less frequent visibility. As investors become more engaged with markets and technology makes real-time data easier to access, the appeal of daily disclosure is growing.
Deciding between mutual funds and ETFs
For many investors, particularly those investing through taxable brokerage accounts, financial planners often suggest prioritizing ETFs due to their tax-efficient design. Some wealth advisors go so far as to recommend avoiding mutual funds in taxable accounts altogether, noting that annual capital gains distributions from mutual funds can increase tax bills significantly.
However, ETFs are not always the optimal choice in every situation. For investors using tax-advantaged retirement accounts — such as IRAs or 401(k) plans — the tax efficiency benefit of ETFs becomes less meaningful. In these environments, mutual funds and ETFs can function similarly from a tax perspective.
There is also an important nuance when comparing ETF “clones” to the mutual funds from which they originate. While some ETFs are constructed as exact replicas of existing mutual funds, others may be similar but not identical. Morningstar analysts caution investors to verify whether an ETF tied to a mutual fund strategy truly mirrors it or simply follows a related approach. A product that behaves like a “cousin” rather than a “twin” may still fit a portfolio, but investors should confirm alignment with their investment goals and style preferences.
Potential trade-offs ahead
The push toward ETF share classes introduces an intriguing scenario: while it enhances investor choice, it may also blur some distinctions that have traditionally benefited ETF holders. Under this model, ETF shareholders would share a portfolio with mutual fund investors, including tax exposure. Market analysts have pointed out that in rare cases, shareholder activity in the mutual fund could trigger capital gains distributions that affect ETF holders, partially reducing the tax advantage commonly associated with ETFs.
Such situations are expected to be uncommon, but they highlight an important consideration as the market adapts to new structures. The ETF market has been celebrated for its efficiency and transparency, and industry professionals emphasize the importance of ensuring that innovations preserve these core strengths.
A turning point for the fund industry
The shift toward ETFs represents more than just structural evolution — it reflects a fundamental change in how investors want to access markets. With cost-sensitive and tax-aware retail investors increasingly dominating the landscape, fund managers are responding by evolving their product offerings and operational models.
As more firms convert mutual funds, introduce parallel ETF options, or seek approval for ETF share classes, industry observers expect a wave of innovation. Advisors believe the next several years will bring a dramatic expansion in ETF offerings, giving everyday investors access to strategies that were once limited to higher-cost mutual fund platforms.
While mutual funds are unlikely to disappear, their dominant position is clearly declining. ETFs have established themselves as a powerful vehicle for modern investors, combining flexibility, transparency, cost efficiency, and tax advantages in a way that aligns with contemporary investing habits.
As regulatory momentum builds and investor demand continues, the financial marketplace appears poised for a new era — one where ETFs play a central role in shaping how Americans build and manage their wealth.
