The $20 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.
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
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
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 and has since rebounded to 8,009 as of 2019. 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, 10% are balanced funds and the remaining 5% are money market funds.
Current Scope and Variety
According to ICI’s 2019 Investment Company Factbook here, at the end of 2018 there were 1,319 capital appreciation funds, 1,527 world funds and 1,907 total return funds available. There were 604 investment-grade bond funds, 247 high-yield funds, 362 world bond funds, 193 government bond funds, 211 multi-sector bond funds and 293 state municipal bond funds. There were also 264 national muni bond funds, 287 taxable money market funds and 81 tax-free money market funds.
The Way Forward
- 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 set a single-year record in 2017 and followed it up with the second-largest inflow ever in 2018. 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 trend is well reflected in the growth of index mutual funds, whose net assets crossed $6.6 trillion at the end of 2018. Index funds in all their forms accounted for 36% of assets in long-term funds last year, up from just 18% in 2008. Much of that growth has been concentered in funds with exposure to domestic equities.
- The Impact of the Fiduciary Rule – The DOL’s long-awaited fiduciary rule, which would have required all financial professionals to work in the best interests of their clients, died in court last year, creating considerable confusion about the way forward. As of September 2019, the Department of Labor was said to be working on new fiduciary rules to align with the Securities and Exchange Commission’s Regulation Best Interest. The new guidelines are expected to be proposed later this year, though an implementation schedule hasn’t been identified yet.
The Bottom Line
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