According to CNBC, asset managers are increasingly launching mutual fund strategies as exchange-traded funds, with 56 mutual funds converting to ETFs in 2024 alone. This represents a dramatic acceleration from just 15 conversions in 2021, with another 40 conversions occurring this year according to Morningstar data. The trend reflects both the growing popularity of ETFs and their advantages for retail investors, particularly those with taxable brokerage accounts who benefit from the vehicles’ tax efficiency and lower costs. Many firms are either converting existing mutual funds directly or creating ETF “clones” that mirror successful mutual fund strategies, giving investors choice between the two formats. This strategic shift by money managers signals a fundamental rethinking of product distribution in the investment industry.
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The Business Model Transformation
The migration from mutual funds to ETFs represents more than just product evolution—it’s a fundamental shift in asset management economics. Traditional mutual funds operated on a “manufacturer-to-distributor” model where asset managers paid significant fees to brokerage platforms and financial advisors to sell their funds. ETFs invert this relationship through their exchange-traded structure, where the product itself becomes the distribution channel. This eliminates or reduces platform fees and creates a more direct relationship with investors. The lower expense ratios of ETFs aren’t just investor-friendly—they’re a strategic necessity in an increasingly competitive landscape where passive management has compressed margins across the industry.
Why This Shift Is Accelerating Now
Several converging factors explain the timing of this migration. First, the SEC’s Rule 6c-11 in 2019 dramatically simplified the ETF approval process, removing regulatory barriers that previously made conversions cumbersome. Second, we’re seeing generational wealth transfer accelerate, with younger investors showing strong preference for transparent, low-cost, and easily tradable vehicles like ETFs. Third, the post-2008 regulatory environment has made fee transparency a priority, putting pressure on the often-opaque fee structures of traditional mutual funds. Asset managers aren’t just following trends—they’re proactively repositioning their product shelves for the next decade of investment flows.
The Strategic Positioning Battle
This conversion wave creates distinct competitive advantages for early movers. Firms that successfully convert popular mutual funds to ETFs capture first-mover benefits in product categories while potentially locking in assets that might otherwise migrate to competitors’ ETF offerings. The “clone” strategy—offering both mutual fund and ETF versions of the same strategy—represents a sophisticated approach to market segmentation. It allows asset managers to serve both the traditional advisor channel (which may still prefer mutual funds) and the direct-to-consumer/digital advisor market that overwhelmingly prefers ETFs. This dual-track approach maximizes asset retention during what amounts to a massive industry transition.
Revenue and Profitability Implications
The financial calculus for asset managers is complex. While ETF expense ratios are typically lower, the potential for massive scale and reduced distribution costs can make them equally or more profitable than their mutual fund counterparts. More importantly, ETFs offer superior “stickiness”—their exchange-traded nature makes them less prone to the redemption pressures that can plague mutual funds during market stress. This stability creates more predictable management fee streams. Additionally, the creation/redemption mechanism unique to ETFs provides tax advantages that benefit both investors and managers by minimizing capital gains distributions, a feature that becomes increasingly valuable in rising markets.
The Future of Fund Distribution
Looking forward, this migration signals the beginning of the end for the traditional mutual fund dominance that characterized the late 20th century. We’re likely to see continued conversion activity, particularly among mid-sized asset managers who need to compete with both the scale of giants like BlackRock and Vanguard and the innovation of fintech-driven entrants. The next phase will involve more sophisticated ETF structures that incorporate elements of active management, potentially blurring the lines between active and passive investing. For investors, this represents a net positive—increased choice, lower costs, and greater transparency—but it also requires understanding the nuances between seemingly similar products with different underlying structures and cost profiles.
