The number of mutual funds is shrinking. There were 22,000 mutual funds in our database as of the end of 2024. This is down from 23,000 at the end of 2023 and 24,000 at the end of 2022.

Mutual fund net flows—dollars invested minus dollars redeemed—have been negative nearly every year since 2015, according to the Investment Company Institute (ICI). The only exception during this 10-year period was 2017.

Additionally, fewer mutual funds have been launched. The data we receive from Morningstar shows 368 mutual funds launched in 2024. This is down from 465 in 2023 and 478 in 2022.

As I explain in this month’s Mutual Funds Guide, exchange-traded funds (ETFs) are among the causes for the decline in mutual funds. There are nearly 4,000 ETFs in existence as of the end of 2024. This is up from 3,300 in 2023 and 3,100 in 2022.

Last year, 716 ETFs were launched—close to double the number of new mutual funds. Nearly one-fifth of these ETFs were defined-outcome ETFs. Such ETFs are designed to limit the range of the returns, particularly on the downside, over a period of time. We will cover them in a future AAII Journal article.

Interest in cryptocurrency also played a role in shift. The iShares Bitcoin Trust ETF (IBIT) was launched on January 5, 2024, and attracted $51.7 billion in assets by the year’s end. This was one of the most successful launches of a fund ever. While ETFs can provide direct expsoure to cryptocurrency, there aren’t any such mutual funds available to individual investors.

Other reasons investment dollars have shifted from mutual funds to ETFs are the better overall tax-efficiency of ETFs, the ability to trade ETFs on an intraday basis, and the more widespread use of ETFs by investment managers, financial advisers and robo-advisers. Increased usage of collective investment trusts in lieu of mutual funds by 401(k) plans and direct indexing is also playing a role. (Direct indexing involves building a portfolio of individual securities to mimic the index instead of buying an index fund.)

Like the old man pleading not to be put on the cart in “Monty Python and the Holy Grail,” the mutual fund industry is not dead yet. Rather, mutual fund assets continue to exceed those of ETFs by a big margin.

Investors tracking widely followed indexes should remain ambivalent about using a mutual fund or an ETF. The difference in expense ratios or tax-cost ratios is not significant for, say, S&P 500 index funds. I certainly would not make the switch from such an index mutual fund to a similar ETF in a taxable account if doing so leads to capital gains taxes being realized.

Expenses Matter, Even When Active Is Perceived as Better

One often-repeated piece of advice is to not buy a bond index fund, on the theory that the peculiarities of the bond market favor active managers.

Last year put this to the test. The bond yield curve swung from short-term yields being above long-term yields (inversion) to long-term yields rising above short-term yields (steepening).

I looked at the funds in the intermediate core bond category to gauge how no-load actively managed mutual funds performed. Eighteen of the 34 active funds in this category outperformed the seven index funds last year. On a five-year basis, however, just 12 of those 34 actively managed funds beat out the best-performing index funds: the Fidelity U.S. Bond Index fund (FXNAX) and the Vanguard Total Bond Market Index Admiral fund (VBTLX).

More telling is the role expense ratios played. The actively managed Vanguard Core Bond Admiral fund (VCOBX) has the lowest expense ratio of all active intermediate core bond funds at 0.10%. It had the seventh-best return out of all (active and index) funds on a one-year basis and the sixth-best return on a five-year basis.

The expense ratio stands out as a predictor of whether a fund has good or bad odds of outperforming its peers. While a low-cost fund can follow a bad strategy, a high-cost fund always has to exceed the gross returns of the low-cost fund just to match its net returns. This holds true for all types of funds, including bond funds and ETFs.

Wishing you prosperity and good health,