A major milestone occurred at the end of 2023 as assets in index funds exceeded assets held by active funds. The major factor behind this shift is an increasing preference for ETFs, while mutual funds are falling out of favor. While there has been much focus on the impressive growth rates of active ETFs, the larger narrative is that ETFs are displacing mutual funds, both active and passive. 

According to Cerulli Associates, active ETFs had $129 billion of inflows last year, while there were $65 billion of inflows into passive mutual funds. In contrast, passive ETFs had inflows of $463 billion, while active mutual funds had net outflows of $576 billion.

A major factor is that ETFs have lower costs while also offering more transparency and liquidity. They are also more tax-efficient than their mutual fund counterparts. Additionally, many advisors are now focusing more on asset allocation than security selection, which is also contributing to growth of ETFs. 

Cerulli also noted that more advisors are moving to independent firms from large broker-dealers. “Those advisors, according to our data, believe less in the merits of active investing,” remarked Matt Apkarian, Cerulli’s associate director of product development.

Another trend is that some portion of outflows from active mutual funds are going into active ETFs. Some new issues in the category have been gaining traction, and more asset managers are jumping on the trend. 

Finsum: Last year, there were net inflows into active and passive ETFs and passive mutual funds. But there were huge outflows from passive mutual funds. A major factor is that ETFs are increasingly in favor due to lower costs and more transparency and liquidity.