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Active Investing ETFs and Mutual Funds Exchange-Traded Funds Mutual Funds

The Great Migration: What’s Behind ETF Asset Growth

A growing number of asset managers are converting traditional mutual funds into ETFs or preparing to offer ETFs as a mutual fund share class.

by Cynthia McLaughlin | January 2026

Featured Tickers:
  • Why asset managers convert mutual funds to ETFs
  • How conversions and ETF share classes work
  • Investor pros and cons of ETF conversions, including performance realities, liquidity and transparency

A growing number of asset managers are converting traditional mutual funds into exchange-traded funds (ETFs) or preparing to offer ETFs as a mutual fund share class. This is being done in response to investors who increasingly favor lower costs, tax efficiency and intraday trading flexibility.

Rather than launching new strategies from scratch, conversions allow asset managers to leverage proven track records, retain assets and modernize their offerings without abandoning well-known fund lineups. A new ETF share class within a mutual fund with a well-known track record can gain investor trust.

An ETF conversion occurs when an existing mutual fund is reorganized into an ETF with the same underlying portfolio. The conversion typically happens on a tax-free basis for shareholders, meaning investors receive ETF shares in place of their mutual fund shares without realizing capital gains at the time of the conversion. After the conversion, the fund operates under the ETF structure, with different trading mechanics, expenses and features.

Industry Developments

Since our October 2024 AAII Journal column on ETF conversions, industry developments have helped accelerate both the rollout of ETFs and the growth of their assets.

Investor Adoption of ETFs Grows

Despite mutual funds still holding far more assets, investor appetite for ETFs remains robust. U.S.-listed ETFs attracted $147.7 billion in November 2025, according to FactSet as reported by ETF.com. This amount fell short of a record $176 billion in October 2025. Heading into December, year-to-date inflows have surged to $1.27 trillion, already setting an annual record.

According to a 2025 survey by Charles Schwab, 93% of ETF investors see ETFs as a necessary part of their portfolio; 61% increased their ETF allocations in 2025, and 75% are extremely likely to purchase ETFs in the next two years.

ETFs as Mutual Fund Share Classes Arise

Mutual funds typically offer investors access to multiple share classes. Vanguard enhanced that structure in May 2001 when it added an ETF as a new share class of Vanguard Total Stock Market Index Admiral fund (VTSAX). This enhancement provided Vanguard’s clients with a choice of investing in the fund through either a mutual fund or ETF, extending ETF tax benefits to mutual fund shares. Vanguard held a patent on this structure for its index-based mutual funds until May 2023.

Asset managers have taken advantage of this patent expiration by submitting applications to the U.S. Securities and Exchange Commission (SEC) for exemptive relief that would permit mutual funds to offer an ETF share class of an existing portfolio. On November 17, 2025, the SEC approved Dimensional Fund Advisors to launch an ETF share class for 13 of its existing mutual funds. This milestone could pave the way for asset managers to deliver streamlined investment solutions, and it may spark a faster shift of assets into ETFs. The dual share class is a mechanism for mutual fund strategies to offer ETFs without having to launch a new stand-alone ETF or convert a mutual fund into an ETF.

How Do Converted ETFs Stack Up?

The converted ETFs shown in Table 1 are displayed by category and ranked by total assets within the category. We only included ETFs with $100 million or more in assets under management (AUM). The average expense ratio is 0.49%. The expense ratios of the ETFs in Table 1 tend to be average and above average (expensive). Of the 92 ETFs in Table 1, 32 have A+ Investor Grades of A or B for their expense ratios, 32 have grades of D or F, and the remaining 28 have grades of C. All ETFs in the table are actively managed.

Even with potential tax advantages, converted ETFs haven’t consistently outperformed. Only 10 (10.9%) of the ETFs in Table 1 have earned A+ Investor Grades of A for the one-, three- and five-year return periods. This grade applies to ETF returns ranking in the top 20% of their category. Five ETFs in the table have returns in the lowest 20% of their category as well as expense ratios ranking in the most expensive 20% of their category.

Table 1 Converted ETFs (Ranked by Total Assets Within Category)

Table 1 (continued)

Download the Excel spreadsheet for Table 1.

Benefits and Drawbacks for Investors

Both converted ETFs and mutual fund ETF share classes present advantages and tradeoffs. ETF investors benefit from tax efficiency, low expenses and tradability compared to mutual funds.

Mutual funds are priced once per day and traded directly with the fund company, while ETFs trade on an exchange throughout the day. Investors can only trade mutual fund shares at the end of the day at the closing net asset value (NAV). ETFs generally provide intraday liquidity and allow investors to use limit orders. Investors can sell ETFs short to profit from falling prices, buy them on margin to increase potential gains (with higher risk), trade options on them to hedge or speculate, and lend ETFs to other investors to earn fees. Plus, the involvement of authorized participants (typically large trading firms) provides volume and helps ETFs trade at or near their NAV. Combined, these characteristics make ETFs a cost-efficient and adaptable choice for investors. In many cases, ETFs feature lower expense ratios compared to mutual funds.

ETFs offer tax efficiency due to in-kind redemptions, while mutual funds may distribute comparatively more capital gains to shareholders. When investors redeem ETF shares, authorized participants typically exchange them for the underlying securities rather than cash, which avoids triggering capital gains at the fund level. Both ETFs and mutual funds can realize capital losses in their portfolios to offset gains, minimizing taxable distributions to shareholders.

ETFs do not sell holdings to meet investor redemptions, unlike mutual funds. However, gains may be realized and distributions may occur when a holding is removed due to index rebalancing or when the ETF portfolio changes materially. ETF shareholders in a dual share class fund may incur capital gains that an ETF could otherwise offset if it operated as a stand-alone fund.

ETF prices fluctuate throughout the trading day based on supply and demand, which can cause them to trade at prices different from their NAV. An ETF’s NAV is updated frequently during the day, and the ETF can trade at a premium (above NAV) or a discount (below NAV). These differences can arise from investor sentiment, intraday trading activity, limited ETF trading volume or less liquid underlying assets. In some cases, the ETF may be easier to trade than its underlying securities. Lower ETF trading volume could lead to wider bid-ask spreads and make it more difficult to sell ETF shares quickly, especially during periods of downward volatility. Mutual funds can always be sold at their NAV.

Passively managed ETFs tracking an index disclose their holdings daily. Full transparency can expose actively managed ETF trades, allowing others to front-run transactions or reveal proprietary portfolio construction. To address this, active ETFs may limit daily disclosure so managers can trade without signaling their intentions to the market. Lack of transparency increases the potential for wider premiums or discounts to NAV. When holdings are less transparent, pricing becomes more uncertain, which, in turn, can widen bid-ask spreads. These conditions allow premiums and discounts to exist.

Other Investor Considerations

Investments in and redemption of mutual funds can be made in a dollar amount chosen by the investor, rather than in whole shares. The ability to buy fractional shares makes mutual funds convenient for making regular contributions to accounts via methods such as dollar-cost averaging. Accumulators may not be able to buy fractional shares of the ETF depending on the broker they use.

ETFs held in retirement accounts such as 401(k)s and individual retirement accounts (IRAs) lose their tax advantages, but they offer possible benefits in terms of fees, flexibility and ease of trading. A downside of this is not being able to transact at NAV and potentially not being able to sell fractional shares to match an exact required minimum distribution (RMD) amount.

After conversion, ETF shareholders will need a brokerage account, versus directly holding mutual fund shares. Some mutual fund companies do offer brokerage accounts, including, but not limited to, Fidelity, Vanguard and T. Rowe Price. 

Discussion

BARRY J from TX posted 7 months ago:

Cynthia, once again, a very good overview of the distinctions that make all the differences between these investment products. Benefit #1: Table 1 closely parallels the Morningstar 9-Box Size/Style Factor matrix which enables AAIIers to build a low-cost, high liquidity, tax-efficient and completely diversified portfolio from the ETFs in this table based on the two key Fama/French factors – size and value. Benefit #2. Most investors have to pay much higher fees to obtain broker recommendations for their funds choices; and Benefit #3: probably pay a significantly more for less benefits (see the list in the article; I counted 12 + and 1-.) Benefit #4 you did all this for us for free. Not a bad benefit for us AAII lifers who famously complain about a lack of value their AAII membership provides, and, oddly enough, simultaneously boast about their investment prowess while ignoring the impact of the “luck of the market” (aka “beta”) a buy and hold portfolio confers. Cost #1 The downside here for AAII is that members don’t need to rely on the AAII Model/Guru Portfolios in the AAI Premium offerings. Benefit #5 Me? AAII articles have made me a “triple threat” investor – I am (1) too dumb to overthink the choices, (2) too happy with the benefits AAII provides to leave you alone, and (3 too fat with the market trading returns a buy and hold portfolio continues to provide.


JOHN J M from WA posted 7 months ago:

ChatGPT research: The first ETF was created in 1993. In the 90's ETF participation in the market was 1% or less. By the 00's ETF participation reached single digit percentages. By the 10's ETF participation reached the teens in digit percentages. In 2025 a typical day of trading was estimated to be about 26-30% of trading in ETFs, with volatile days reaching over 40%. These last figures referenced to Investopedia and State Street. AAII has done a great job keeping investors abreast of this evolution. The monthly classification of ETF market data in the AAII A-plus service has been very valuable. Portfolio construction using this service has made me a successful investor.


WARREN B from TN posted 7 months ago:

The rise of ETFs parallels the rise of indexing as an investment strategy. This was abetted by the financial planning profession, who found that investing by category (asset allocation) to be easier and less time consuming than investing in individual issues. Broker compliance departments like ETFs because it simplifies oversight. A broker is likely to get into less trouble buying an ETF rather than a single stock. In fact, some brokerage firms prohibit their brokers from buying individual securities. I see two issues at present. As even John Bogle pointed out, index ETFs have led to over-concentration as a few stocks dominate the index. Depending on who and when you ask, ten stocks make up 30-35 percent of the value of the Standard and Poors 500 Index. This means that 490 stocks make up the balance. Not a lot of diversification. Such index ETFs are investments aided and supported by fund flows rather than merit. As funds come in, a computer buys the stocks based on their weight in the portfolio. No analysis is performed. This creates the second issue: most people do not know what is in their index ETFs. With ETFs going up in value, no one questions the way the money is made. But with this prophylactic between investor and investment, will there be more compunction to sell when matters get volatile? When funds flow out, a computer will sell the same stocks in the same proportion. Finally, actively traded ETFs have fees comparable with actively traded mutual funds. Aside from some tax advantages in owning ETFs in taxable accounts vs. mutual funds, they do not, in my opinion constitute an advantage over mutual funds. Nor does either investment vehicle have an advantage in comparison to buying individual stocks. More work, but better potential payoff.


JOHN J M from WA posted 7 months ago:

Warren B: Mutual funds emerged as a way to invest that was more comprehensive and less time consuming compared to individual security selection for investors. It was successful in broadening market participation which is beneficial to both the market and to individuals. ETFs continue on the same track with a specific advantage: tracking daily transaction volume across continuous pricing of the investment. This is a tool for analysis at the fund flow level. Fund flow does measure merit in the abstract. Funds will not flow to inferior aggregate investments for very long. As for augmented selling under conditions of volatility, the effect of intermediaries who mediate for individual investors for both mutual funds and ETFs should create a lag in selling pressures in any general downtrend. Overall, ETFs should not alter the eventual equilibrium prices as prices decline in the market or make the market more irrational than it otherwise would be. The controlling factor remains human nature.


BARRY J from TX posted 7 months ago:

Jason Zweig, the WSJ columnist, disciple of Benjamin Graham, and one of Warren Buffett's preferred chroniclers, just posted a column today 01/09/26 that discusses another issue that ETF users should consider when investing in factor-based ETFs. #1 Every ETF states what they plan to invest 80% of AUM in the specific factor in the fund's title, usually selected from the Fama & French's famous list -- size (small caps), value (cheaper vs category measured by P/E, P/B, P/S, etc.), growth (increasing valuation/capitalization), quality (higher income and lower debt), or momentum (relative price strength vs category). #2 Many investors use factor-based ETFs to diversify their portfolio to reduce exposure to market volatility (random price changes, Sharpe's original factor, market beta). #3 You should inspect the Top 10 holdings to see if the fund manager(s) have sneaked in a few "ringer" stocks that may not meet the definition of the factor in the EFYT's title. They are allowed to do that as long as they hew to their commitment to hold 80% factor-related stocks, but they can -- and many do these days -- hold one or more stocks that do not meet the stated fund strategy. #4 Zweig uses the example of holding TSLA -- nobody's definition of a "value" stock with a P/E well over 100 -- in a value fund to "juice" returns by offsetting low returns of some true value stocks (cheaper vs category measured by P/E, P/B, P/S, etc.) they hold. Regards


JAYANTILAL P from PA posted 7 months ago:

Why Vanguard ETF is not in the list ?


BARRY J from TX posted 7 months ago:

Good question, JP. Let's play Clouseau and look in the Clues Closet to see if there are any clues for "who dun it"? BIG CLUE #1 QUOTE: "All ETFs in the table are actively managed." VGD tends toward offering passively-managed ETFs. #2 Why did zero Vanguard (a long-term Top 3 ETF market leader with BLK and SST for most ETFs offered and the highest AUMs) ETFs cut to be on the list? BIG CLUE #3 Did VGD have no ETFs "converted" from mutual funds? See Clue #1. #4 Did VGD ETFs not qualify for the categories? See Clue #1. #5 Were their total AUM within the category too low (< $100M AUM? #6 ANOTHER BIG CLUE: "The average expense ratio is 0.49%. The expense ratios of the ETFs in Table 1 tend to be average and above average (expensive)." VGD ETFs tend to offer VERY LOW ERs. AAII Grades is IMPORTANT CLUE #7. "FOR THEIR ERs ... "Of the 92 ETFs in Table 1, 32 [35%] have A+ Investor Grades of A or B . 35% have grades of D or F, and 30% have grades of C." It looks like this list is biased to favor (promote?) high-cost ETFs. Good catch, JP. In defense of Cynthia, this list may have been generated by the new staff member, James. ADDENDUM: I am seeing an increasing number of factual errors in articles. This morning, a WSJ article stated that Vandenburg AFB was located in Van Nuys, CA. (It was due to poor sentence structure, but chatbots like to have fun to see if anyone is paying attention. Many folks aren't. I foresee a huge increase in demand for work-at-home fact-checkers. Regards.


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