If you can’t beat them, invest in them.
Market participants have been shunning mutual funds, moving instead to exchange-traded funds. Like mutual funds, ETFs also offer baskets of securities tracking the most popular asset classes, regions, and strategies, but do so for generally lower fees and greater tax efficiency. Increasingly, mutual-fund managers have been turning to ETFs as well.
According to data from Morningstar, 1,222 mutual funds held an ETF as a component of their portfolio in 2016, the most recent period for which data is available. The median size of the ETF holdings were 4.5% of the mutual fund’s total assets under management.
In 2006, only 595 mutual funds held an ETF, comprising 1.2% of the assets.
While the number of mutual funds with ETF positions doubled over the past decade, those are still the minority: there were more than 9,000 U.S. mutual funds in 2015, according to the 2016 fact book put out by the Investment Company Institute. The category held $15.7 trillion in assets.
While the top ETFs for mutual funds to hold were equity based, six of the most widely held were bond funds, including two “junk bond” funds. While Morningstar didn’t list which mutual funds used which ETFs, fund managers might look to fixed-income ETFs as an easy way to get broad exposure to a segment of the bond market, particularly less liquid ones, like emerging market debt.
The most popular ETF for mutual funds to hold, perhaps not surprisingly, was the SPDR S&P 500 ETF Trust
the most widely traded and largest ETF on the market, with $232 billion in assets. As of year-end 2016, 134 mutual funds held the S&P 500-tracking fund as a component.
Among other widely held ETFs, the iShares Russell 2000 ETF
was held by 133 mutual funds, while 126 counted the iShares TIPS Bond ETF
as a component of the portfolio. That was enough to make the fund, which tracks Treasury inflation-protected securities, the most popular fixed-income ETF among mutual funds.
For the top 10 ETFs held by mutual funds, refer to the table below.
|Fund||Number of mutual funds that own it|
|SPDR S&P 500 ETF Trust||134|
|iShares Russell 2000 ETF||133|
|iShares TIPS Bond ETF||126|
|SPDR Bloomberg Barclays High Yield Bond ETF
|Vanguard FTSE Emerging Markets ETF
|iShares iBoxx $ High Yield Corporate Bond ETF
|PowerShares Senior Loan Portfolio
|iShares MSCI EAFE ETF
|iShares J.P. Morgan USD Emerging Markets Bond ETF
|Vanguard REIT ETF
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