[Updated on August 29, 2017 by David Dierking] The $17 trillion mutual fund industry remains one of the most popular landing spots for average investors. In recent years, however, growth in the mutual fund space has begun to slow, while interest in exchange-traded funds, or ETFs, is exploding.
Mutual funds have been and continue to be favored as workplace retirement plan options, but the fund world is evolving. Despite these changes, the size of the industry is still impressive.
If you are wondering whether mutual funds are right for you, you should read why mutual funds should be a part of your portfolio.
A Brief History
The first ancestor of the mutual fund was created in 1774 in the Netherlands by Abraham van Ketwich, a Dutch merchant who wished to provide a means for middle-class citizens to partake in a larger investment pool. His idea quickly spread throughout Europe, and in 1868 the British government issued shares of the Foreign and Colonial Government Trust, which still trades on the London Stock Exchange today.
Be sure to also read A Brief History of Mutual Funds.
America got into the act in 1893 with the Boston Personal Property Trust, which was soon followed by the Alexander Fund. Many historians consider this fund to be the first “real” mutual fund, as it allowed for investor withdrawals upon demand. Mutual funds began to appear in their modern form during the Roaring Twenties. Wellington and Vanguard Funds were incepted during this time, and then the market crash and Great Depression led to the filing and disclosure requirements that were laid out in the Securities Act of 1933 and the Securities Exchange Act of 1934.
From there, the number of available funds became larger and more diverse, and they grew in usage and popularity through the turn of the century. The internet boom of the 1990s caused mutual funds to explode in popularity as employees and consumers became able to establish savings and retirement accounts online and make instantaneous changes and transactions at the touch of a button.
The Standard & Poor’s American Depository Receipt (SPDR) became the first exchange-traded fund to be offered to the public in 1993, and it was soon followed by a host of other ETFs that invested in every type of asset class, country and type of company in existence. There are now ETFs that function as sophisticated trading instruments that allow investors to take inverse positions against the market and create complex hedging strategies that can satisfy various trading objectives.
Total Fund Assets Today
As of June 30, 2017, the mutual fund industry had approximately $17.4 billion in total assets, a gain of nearly 10% when compared to the same day one year earlier. The majority of those gains come from equity funds, where strong returns in the neighborhood of 15-20% during that time helped offset net outflows from these funds. Over the past year, investors have instead directed new investments mainly into the relative safety of fixed-income products, despite modest performance. Still, about 54% of mutual fund assets belong to equity funds, with the remainder split among bond, money market and balanced funds.
The number of mutual funds in existence has fluctuated since its peak in 2001. As the dot-com bubble was bursting, there were 8,305 different funds. That number shrank to 7,556 in 2010, but has since risen to 8,049 in 2017. As is the case with mutual fund assets, equity funds constitute the majority of funds available. Currently, 59% of funds focus on equities, 27% are fixed-income, 9% are balanced funds and the remaining 5% are money market funds.
Current Scope and Variety
As the mutual fund industry has evolved, the variety of different products and target universes has grown considerably.
According to the ICI, at the end of 2016 there were 1,315 capital appreciation funds, 1,518 world funds and 1,919 total return funds available. There were 625 investment-grade bond funds, 245 high-yield funds, 370 world bond funds, 190 government bond funds, 171 multi-sector bond funds and 319 state municipal bond funds. There were also 256 national muni bond funds, 319 taxable money market funds and 102 tax-free money market funds.
The Way Forward
The mutual fund industry is currently dealing with a number of industry trends and challenges.
- Dropping Fees – Expense ratios on virtually every type of fund have been dropping for the last several years, and that trend is expected to continue. As investors demand cheaper investment options, fund providers have been willing to listen by lowering fees on active and passive funds alike.
- The Threat from ETFs – ETF inflows have set a single-year record in 2017, and it’s still only August. The ETF market is only about 20% of the size of the mutual fund industry, but that number will likely continue to grow.
- Inflows to Index Funds – Actively managed funds have developed a reputation of delivering below-average performance at above-average costs. As a result, investors have flocked to low-cost index funds that seek to match an index instead of beating it.
- The Impact of the Fiduciary Rule – If the DOL’s fiduciary rule goes into effect, it will require all financial professionals to work in the best interests of their clients. Brokers, who work on a commission basis, could be significantly impacted. The rule could also lead to better disclosure of fees and conflicts of interest, as well as lower fees overall.
The Bottom Line
The mutual fund industry is still a behemoth, but is facing challenges on multiple fronts. ETFs are presenting a growing threat, while government regulation could change the landscape of investment advice that investors receive from financial intermediaries. Investors should always examine their own risk preferences, goals and cost considerations before considering a mutual fund investment.
Be sure check our News section to keep track of the recent fund performances.