ETFs surpassed mutual funds in assets under management around 2023

Exchange-traded funds (ETFs) became larger than mutual funds by total assets sometime in 2023, though the exact month varies depending on which data source you consult. The crossover happened gradually over several years — ETFs grew steadily while mutual fund assets stayed relatively flat — but by mid-2023, ETF assets exceeded mutual fund assets for the first time in history.

This shift matters because it reflects how investors' preferences have changed. For decades, mutual funds dominated. Now ETFs are the larger category, and that trend has continued. The gap has only widened since the crossover point.

Key Takeaways

  • ETF assets surpassed mutual fund assets in 2023, marking a historic shift in how Americans invest.
  • ETFs grew faster than mutual funds over the previous decade, while mutual fund assets remained relatively stable.
  • Lower costs and tax efficiency made ETFs increasingly attractive to both individual investors and financial advisors.
  • Mutual funds still hold substantial assets and remain a legitimate investment choice, but they are no longer the dominant vehicle.

Why ETFs grew faster than mutual funds

ETFs have several structural advantages that made them more appealing to investors over time. They typically charge lower expense ratios — the annual fee you pay to own the fund — because they are cheaper to operate. An ETF that tracks the S&P 500 might cost 0.03% per year, while a mutual fund tracking the same index might cost 0.05% or more. Over decades, that difference compounds.

Tax efficiency is another reason. When mutual fund managers sell securities to rebalance the portfolio, they create capital gains that get passed to shareholders, who then owe taxes. ETFs use a different mechanism called "in-kind redemption" that avoids triggering those taxable events. For investors in taxable accounts, this matters significantly.

ETFs also trade throughout the day like stocks, while mutual funds only price once per day after the market closes. This flexibility appeals to active traders, though it is less relevant for buy-and-hold investors. The combination of lower costs, tax advantages, and trading flexibility made ETFs increasingly attractive to advisors and individual investors alike.

How mutual fund assets have changed since the crossover

Mutual fund assets did not collapse when ETFs surpassed them. Instead, mutual funds have remained relatively stable or grown modestly in absolute terms, but they have lost market share. New money flowing into the market has gone disproportionately into ETFs rather than mutual funds.

Some mutual fund categories have held their ground better than others. Target-date funds — which automatically shift from stocks to bonds as you approach retirement — remain popular in 401(k) plans. Actively managed mutual funds, where a manager picks individual stocks rather than tracking an index, have seen more outflows because they charge higher fees and often underperform index-based alternatives.

What this shift means for your investment choices

The fact that ETFs are now larger does not mean mutual funds are a bad choice. Many mutual funds are well-constructed, low-cost, and appropriate for long-term investors. The shift simply reflects that ETFs have become the default choice for many people, especially those building new portfolios.

If you already own mutual funds, there is no urgent reason to sell them and switch to ETFs. The tax consequences of selling could outweigh the benefits of lower ongoing costs. However, if you are building a new portfolio or rebalancing an existing one, ETFs often make more sense from a cost and tax perspective.

The crossover also means that financial advisors and investment platforms have increasingly built their offerings around ETFs. You will find more ETF options, better research tools for ETFs, and more educational content about ETFs than you did a decade ago. This abundance of choice and information makes ETFs easier to use for most investors.

The difference between index and actively managed funds in this shift

The growth of ETFs has been driven largely by index-based ETFs — funds that track a market index like the S&P 500 rather than trying to beat it. Index mutual funds also grew, but index ETFs grew faster because of their cost and tax advantages. The real loser in this shift has been actively managed mutual funds, which charge higher fees and have struggled to justify their costs.

Actively managed ETFs exist but represent a smaller portion of the ETF market. Most ETF growth has come from passive, index-tracking products. This reflects a broader trend: investors increasingly believe that paying for active management does not deliver enough extra return to justify the extra cost.

Where mutual funds still dominate

Despite the crossover, mutual funds remain the default investment vehicle in certain contexts. Most 401(k) plans still offer primarily mutual funds rather than ETFs, though this is slowly changing. Employer retirement plans often use mutual funds because the plan administrator can negotiate lower institutional pricing and because the daily pricing aligns with how 401(k) contributions are processed.

Mutual funds also remain common in college savings plans (529 plans) and in advisor-managed accounts where the advisor builds a custom portfolio. Some investors also prefer mutual funds because they do not trade on an exchange — you buy and sell directly from the fund company at the end-of-day price, which can feel simpler than trading on a stock exchange.

How to decide between a mutual fund and an ETF today

If you are choosing between a mutual fund and an ETF that track the same index, compare the expense ratio first. If the ETF is cheaper, it usually wins unless you have a specific reason to prefer the mutual fund (such as automatic investment plans or integration with your existing account). Over 20 or 30 years, a difference of 0.05% per year adds up.

Consider also whether you are in a taxable account or a tax-advantaged account like an IRA. In a taxable account, the tax efficiency of ETFs matters more. In an IRA or 401(k), where you do not pay taxes on gains until withdrawal, the tax difference between a mutual fund and an ETF is irrelevant.

Finally, think about your investment style. If you plan to buy once and hold for decades, the trading flexibility of ETFs does not matter to you. If you plan to rebalance frequently or trade actively, the ability to buy and sell an ETF during market hours might be valuable.

Frequently Asked Questions

Does the fact that ETFs are now larger mean mutual funds are going away?

No. Mutual funds still hold hundreds of billions in assets and remain a legitimate investment choice. The crossover simply means that new money is flowing into ETFs faster than into mutual funds. Mutual funds will likely remain available for decades, especially in retirement plans.

Should I sell my mutual funds and switch to ETFs?

Not necessarily. If your mutual funds are in a taxable account and have large unrealized gains, selling them would trigger capital gains taxes that could outweigh the benefit of lower ongoing costs. If they are in a tax-advantaged account like an IRA, the tax difference between mutual funds and ETFs does not matter. Evaluate based on your specific situation, not just the industry trend.

Why do 401(k) plans still offer mostly mutual funds instead of ETFs?

Mutual funds work better with how 401(k) plans operate. Contributions are processed at the end of each day, which aligns with mutual fund pricing. ETFs trade during market hours, which creates timing complications for automatic contributions. Plan administrators also negotiate institutional pricing on mutual funds that can be very competitive.

Are index ETFs or index mutual funds better for a beginner?

For most beginners, index ETFs are the simpler choice today because they are cheaper, more tax-efficient, and easier to research. However, if you are investing through a 401(k) or if a specific low-cost index mutual fund is available to you, either option works well. The most important decision is to start investing, not to optimize between these two similar products.

Can I own both mutual funds and ETFs in the same portfolio?

Yes. Many investors own both. You might own mutual funds in your 401(k) because that is what your plan offers, and ETFs in your taxable brokerage account because they are more tax-efficient. There is no rule against mixing them, and doing so is common.