Wall Street's Mutual Fund-to-ETF Magic Trick Is Failing to Wow

“You have to do something,” said Balchunas. “The ETF market is simply where the fish are biting. It’s the preferred vehicle of the vast majority of advisors and even investors at large.”

It’s still early days in the era of mutual fund-to-ETF conversions. The first ever switch of a US mutual fund to an ETF took place almost two years ago, and there have been 39 conversions since then of assets worth roughly $67 billion, according to Bloomberg data. Fidelity and Neuberger Berman are among asset managers to reinvent products.

And a fresh catalyst for conversions may be on the horizon. A November US Securities and Exchange Commission proposal may increase costs for some mutual funds, and in some cases cause issuers to consider converting funds to ETFs, according to Bloomberg Intelligence.

Yet, there remain headwinds for many fund issuers exploring a conversion. One is the entrenched position of mutual funds in the American retirement system, where their stability and fractional share trading are more valuable than their ETF counterparts.

“Mutual funds work really well in certain channels where ETFs may not work as well, such as in the 401(k) market,” said Deborah Fuhr, co-founder of ETFGI, adding that as money managers defend their profitable mutual fund businesses there’s not a lot of incentive for them to push ETFs in the 401(k) system.

A mutual fund may often have different share classes — for institutions, for pensions, for retail investors — with varying fees. That makes it more complicated to switch to an ETF, which has one share class.

“That’s why the conversion, while certainly a trend to watch, isn’t necessarily going to accelerate as quickly as some of the industry might expect,” said Holly Framsted, head of ETFs at Capital Group.