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Record $1 trillion + inflow into ETFs in 2024 - WSJ
”Investors plowed more than $1 trillion into U.S.-based exchange-traded funds in 2024, shattering the previous record set three years ago and raising Wall Street hopes for an even bigger year ahead. Longer-term trends also played a role as investors extended a yearslong practice of swapping their mutual funds for the greater tax advantages and easy trading of ETFs. Total assets in U.S.-based ETFs reached a record $10.6 trillion at the end of November, according to monthly ETFGI data, an increase of more than 30% from the start of 2024.”
Looking at the total assets of OEFs and ETFs (ICI data) as of 11/2024,
OEFs 73.42%, ETFs 26.58%.
But there are record amounts in the money-market funds, 16.92% of the total OEF + ETF assets, but that's all in OEFs, nothing in ETFs. Taking out the money-market funds (i.e. only stocks, bonds and alternatives),
OEFs 68%, ETFs 32%. (ex-money-market funds)
Amazing for the ETFs that have existed only since 1990s, while the OEFs go back to 1920s.
A clone is a different fund with a different portfolio. So you can't do a tax-free exchange, let alone a sell-and-buy from a fund to its clone.
Even if the ETF were another share class of the same fund (as VOO is another share class of VFIAX), a sell and a buy would be a taxable event. Only the fund sponsor (e.g. Vanguard) or a broker working with the sponsor could execute a tax-free exchange for you. If you tried to do an exchange on your own, that would be considered a sell-and-buy and be a taxable event.
Note that if you were to sell one share class at a loss to buy a different share class, that would almost surely be considered a wash sale and your loss would be deferred. Whether you could recognize the loss if "swapping" into a clone is less clear. (Is the clone "substantially identical" to the original?) I'm guessing this would also be a wash sale. You, your tax advisor, or the IRS might or might not agree.
Vanguard allows tax-free online conversion from its OEF to the ETF class, but not the reverse. To do this at other brokers, be very careful with your instructions. A simple sell-OEF & buy-ETF will have tax consequences - & may be irreversible. It won't matter for tax-deferred/free a/c. When an OEF converts to ETF, that can be tax-free in most cases.
Even with careful instructions to the broker, if the fund sponsor doesn't approve, you may not be able to do a tax-free exchange from one share class to another of the same fund.
I ran into this with a Blackrock fund. I had service class shares. Then Fidelity made the A shares NTF (load waived, no fee). Those shares had a slightly lower ER. I asked Fidelity to do a non-taxable exchange.
Fidelity checked with Blackrock and told me that Blackrock would not permit that. I would have to sell and buy (and recognize gain on the sale).
When an OEF converts to ETF, that can be tax-free in most cases.
More notoriously, Vanguard did a tax-free merger of its institutional and retail target date funds (different funds, not different share classes) after making changes (changing ERs) that triggered huge cap gains distributions.
Vanguard could have first merged the funds, then lowered the fees, the suit says. If the process had proceeded in that order, the lawyers argued, there would have been no flood of fund sales and no tax shock for retail investors.
what are the advantages of converting OEFs to their ETFs? Tax? Lower expense ratio?
Can Vanguard do the conversion by themselves online or this can only be done with Vanguard agents?
Thank you
The cynic in me says that the advantage is marketing. As Yogi observed, ETFs are hot.
From the investor perspective, ETFs can be more tax efficient. Though Vanguard is different: - the ETFs are just share classes of their OEFs, so all share classes have the same tax efficiency - broad based index Vanguard funds haven't made cap gains distributions in decades
Costs tend to be a little lower with ETFs, due in part to the authorized participants doing the actual trading of underlying securities. Also, when APs buy and sell shares directly with the ETF (not on exchanges) the transactions are in large blocks (creation units). That lowers costs. And the AP may be required to pay a fee for trading creation units.
I think your other question is whether Vanguard customers can do the exchange online themselves. I believe the answer is yes, but I haven't checked recently. Even if you can do it yourself, be careful to check all the right boxes so that it isn't treated as a sell-and-buy.
Q. How does inflow/outflow/trading play a dynamic in the OEF/EFT share price?
I wonder if share price is more about inflows (euphoria), outflows (pessimism) and trading (daily inflow/outflow) than fundamentals.
@ybb report the AAII investor sentiment periodically. A subgroup of buyers, sellers, and traders who are probably buying, selling, and allocating their holdings quite differently than say another subset of other investors such as Institutional Investors. Institutional Investors seem to allocate closer to a longer term buy and hold strategy. Paying attention to how institutional investors buy, sell and allocate at any given moment would be an interesting data point. Conversely, TV shows, like Fast Money, and other investing forums, like MFO, have their own subset of "investors".
Anyway, it seems the market price of assets are more often about "flows" than "fundamentals". I might be worth knowing how "flows" push around the price of any asset and if Mr Market's assessment of price holds merit.
Consider the recent price of Bitcoin.
JPM's analyst, Michael Cembalest, consider Bitcoins recent price jump directly related to the endorsement (political support it received) through funded PACs (Political Action Committees) who support the further adoption of "all things crypto". These PAC's and their candidates were all successfully (voted in) as candidates in the 2024 national election cycle.
Anyway, how do we better understand the ups (inflows), avoid the downdrafts (outflows) and the trading (short term Inflow/outflow) which all create a unique type of volatility (The Volatility of the Crowd), which is different (and increasingly reported...makes better news) than the volatility of underlying fundamental?
OEF prices aren't affected by inflows/outflows. Premium/discounts of ETFs are affected a bit by inflows/outflows. Premium/discounts of CEFs are affected a lot by inflows/outflows.
I worry that in a market rout, the heavy reliance on ETFs will amplify the downward spiral. With an OEF the manager has some discretion (albeit limited) when and what to unload. With an ETF it’s a direct pass-through. Owning stocks in an ETF may subject the holder to greater loss during a severe market downturn than in an OEF. I’d like to believe that the investor base is more stable in a fund like DODBX or PRWCX then in an index based ETF. Shareholders are less likely to flee in a downturn. The highly touted tax advantages of ETFs disappear if you hold them in a tax-deferred / tax-exempt account.
Advantages to the fund firm? You can’t sue them for mismanagement after severe losses (or at least it would appear harder). Their record keeping / overhead / management expenses are less. And of course there’s the money draw. People like to trade. After the 2003 Strong Funds fiasco & related government frequent trading / “skimming” investigations and the follow-up SEC mandated “reforms”, trading mutual funds got a lot harder. ETFs remove those supposedly “investor-friendly” restrictions. Back to the present.
A bit related: Americans have a greater % of their household wealth invested in stocks today then ever before. I can’t find a good link, but have seen that reported a number of times in recent weeks.
[snip] what are the advantages of converting OEFs to their ETFs? Tax? Lower expense ratio?
Can Vanguard do the conversion by themselves online or this can only be done with Vanguard agents?
Thank you
Daniel Wiener or Jeffrey DeMaso from the Independent Adviser for Vanguard Investors compared after-tax returns for Vanguard index fund Admiral shares with the corresponding ETF share class. After-tax returns, for all intents and purposes, were the same. From my recollection, sometimes one or the other held a one bps or two bps advantage.
I've read you want to hold ETF's in taxable accounts since they are more tax efficient. They pay less capital gains than OEF. They usually have lower ER's also.
Comparisons are hard to come by owing to the recency of ETFs that replicate (or approximate) a longer standing OEF. One target that sheds a little light on the subject might be the Leuthhold core investment funds. Over 3 years (according to Morningstar) LCR has returned 4.97% Vs 4.71% for its older sibling LCORX. To me, the listed portfolios appear nearly identical. This would support ETF proponents’ claims that the lower fee translates into higher return.
Color me skeptical. One example is hardly conclusive evidence. Three years is a previous short time to draw conclusions. What will happen over longer market cycles (periods of heavy fund outflows, liquidity crunches, recessions, investor panics, etc.) is still largely unknown.
Taxes? I’d venture to guess 70%+ of the invested funds discussed here (this site) are under some sort of tax sheltered umbrella (IRA, 401K, similar). TMK there’s never been a poll. There are a lot of retirees. If that’s the case, then the tax issue is not on the table for the majority of us. But, yes, tax savings are important to a substantial number of participants. ETFs win on the tax front from everything I’ve read - but am not expert. On occasions when I’ve held significant non-sheltered assets, I’ve simply placed them into munis - side-stepping the issue.
@yogibb, thank you. The first link was particularly useful. For our purpose, saving a 0.01% in expense ratio is not enough. We have Vanguard OEFs outside of Vanguard brokerage. We prefer to use the ETFs for additional investment without incurring additional transaction fees.
Comments
OEFs 73.42%, ETFs 26.58%.
But there are record amounts in the money-market funds, 16.92% of the total OEF + ETF assets, but that's all in OEFs, nothing in ETFs. Taking out the money-market funds (i.e. only stocks, bonds and alternatives),
OEFs 68%, ETFs 32%. (ex-money-market funds)
Amazing for the ETFs that have existed only since 1990s, while the OEFs go back to 1920s.
Even if the ETF were another share class of the same fund (as VOO is another share class of VFIAX), a sell and a buy would be a taxable event. Only the fund sponsor (e.g. Vanguard) or a broker working with the sponsor could execute a tax-free exchange for you. If you tried to do an exchange on your own, that would be considered a sell-and-buy and be a taxable event.
Note that if you were to sell one share class at a loss to buy a different share class, that would almost surely be considered a wash sale and your loss would be deferred. Whether you could recognize the loss if "swapping" into a clone is less clear. (Is the clone "substantially identical" to the original?) I'm guessing this would also be a wash sale. You, your tax advisor, or the IRS might or might not agree.
To do this at other brokers, be very careful with your instructions. A simple sell-OEF & buy-ETF will have tax consequences - & may be irreversible. It won't matter for tax-deferred/free a/c.
When an OEF converts to ETF, that can be tax-free in most cases.
what are the advantages of converting OEFs to their ETFs? Tax? Lower expense ratio?
Can Vanguard do the conversion by themselves online or this can only be done with Vanguard agents?
Thank you
I ran into this with a Blackrock fund. I had service class shares. Then Fidelity made the A shares NTF (load waived, no fee). Those shares had a slightly lower ER. I asked Fidelity to do a non-taxable exchange.
Fidelity checked with Blackrock and told me that Blackrock would not permit that. I would have to sell and buy (and recognize gain on the sale).
When an OEF converts to ETF, that can be tax-free in most cases.
Typically, restructurings are nontaxable events. When PIMCO converted its D class shares into A class shares, that was a nontaxable event.
https://riaconnection.axosadvisorservices.com/uploads/6/5/8/0/65802149/2018.03.23_pimco_share_class_conversion_d_to_a.pdf
More notoriously, Vanguard did a tax-free merger of its institutional and retail target date funds (different funds, not different share classes) after making changes (changing ERs) that triggered huge cap gains distributions.
https://taxprof.typepad.com/taxprof_blog/2022/04/ny-times-holders-of-vanguard-target-funds-file-class-action-over-massive-capital-gain-tax-bills.html
From the investor perspective, ETFs can be more tax efficient. Though Vanguard is different:
- the ETFs are just share classes of their OEFs, so all share classes have the same tax efficiency
- broad based index Vanguard funds haven't made cap gains distributions in decades
Costs tend to be a little lower with ETFs, due in part to the authorized participants doing the actual trading of underlying securities. Also, when APs buy and sell shares directly with the ETF (not on exchanges) the transactions are in large blocks (creation units). That lowers costs. And the AP may be required to pay a fee for trading creation units.
I think your other question is whether Vanguard customers can do the exchange online themselves. I believe the answer is yes, but I haven't checked recently. Even if you can do it yourself, be careful to check all the right boxes so that it isn't treated as a sell-and-buy.
https://militarymoneymanual.com/convert-vanguard-mutual-funds-to-etf-online/
https://help.m1.com/en/articles/9332002-can-i-convert-my-vanguard-mutual-fund-shares-into-etfs
I wonder if share price is more about inflows (euphoria), outflows (pessimism) and trading (daily inflow/outflow) than fundamentals.
@ybb report the AAII investor sentiment periodically. A subgroup of buyers, sellers, and traders who are probably buying, selling, and allocating their holdings quite differently than say another subset of other investors such as Institutional Investors. Institutional Investors seem to allocate closer to a longer term buy and hold strategy. Paying attention to how institutional investors buy, sell and allocate at any given moment would be an interesting data point. Conversely, TV shows, like Fast Money, and other investing forums, like MFO, have their own subset of "investors".
Anyway, it seems the market price of assets are more often about "flows" than "fundamentals". I might be worth knowing how "flows" push around the price of any asset and if Mr Market's assessment of price holds merit.
Consider the recent price of Bitcoin.
JPM's analyst, Michael Cembalest, consider Bitcoins recent price jump directly related to the endorsement (political support it received) through funded PACs (Political Action Committees) who support the further adoption of "all things crypto". These PAC's and their candidates were all successfully (voted in) as candidates in the 2024 national election cycle.
eye-on-the-market/the-alchemists - The crypto Presidency: on the crypto rally and the sky-high return on political donations Page 37 starts this discussion.
Anyway, how do we better understand the ups (inflows), avoid the downdrafts (outflows) and the trading (short term Inflow/outflow) which all create a unique type of volatility (The Volatility of the Crowd), which is different (and increasingly reported...makes better news) than the volatility of underlying fundamental?
Premium/discounts of ETFs are affected a bit by inflows/outflows.
Premium/discounts of CEFs are affected a lot by inflows/outflows.
Advantages to the fund firm? You can’t sue them for mismanagement after severe losses (or at least it would appear harder). Their record keeping / overhead / management expenses are less. And of course there’s the money draw. People like to trade. After the 2003 Strong Funds fiasco & related government frequent trading / “skimming” investigations and the follow-up SEC mandated “reforms”, trading mutual funds got a lot harder. ETFs remove those supposedly “investor-friendly” restrictions. Back to the present.
A bit related: Americans have a greater % of their household wealth invested in stocks today then ever before. I can’t find a good link, but have seen that reported a number of times in recent weeks.
https://www.visualcapitalist.com/american-stock-ownership-by-share-of-financial-assets/
compared after-tax returns for Vanguard index fund Admiral shares with the corresponding ETF share class.
After-tax returns, for all intents and purposes, were the same.
From my recollection, sometimes one or the other held a one bps or two bps advantage.
Color me skeptical. One example is hardly conclusive evidence. Three years is a previous short time to draw conclusions. What will happen over longer market cycles (periods of heavy fund outflows, liquidity crunches, recessions, investor panics, etc.) is still largely unknown.
Taxes? I’d venture to guess 70%+ of the invested funds discussed here (this site) are under some sort of tax sheltered umbrella (IRA, 401K, similar). TMK there’s never been a poll. There are a lot of retirees. If that’s the case, then the tax issue is not on the table for the majority of us. But, yes, tax savings are important to a substantial number of participants. ETFs win on the tax front from everything I’ve read - but am not expert. On occasions when I’ve held significant non-sheltered assets, I’ve simply placed them into munis - side-stepping the issue.