The Great Mutual-Fund-to-ETF Migration

The growth of active ETFs has propelled a wave of mutual fund-to-ETF conversions. Nearly 80% of all new product launches in both the third quarter and for the full year have been actively managed. As investors seek more flexibility, transparency and cost efficiency, more asset managers are repackaging existing mutual funds into active ETF wrappers. At least 119 total mutual funds have now been converted since 2021, according to data from Morningstar. And the steady stream of conversions continues, with total converted assets now approaching $100 billion.

The movement maintains a steady pace on both a total fund and cumulative assets basis. The number of conversions nearly doubled from 2022 to 2023, with at least 45 conversions totaling more than $10 billion assets in 2024.

Two of the world’s largest active players have successfully transitioned mutual funds into ETFs.

Dimensional Fund Advisors was among the first to embrace the trend, seamlessly converting its systematic, tax-managed offerings into ETFs without a hitch. These funds, designed for taxable accounts, were already low-cost and did not charge 12b-1 fees, which meant no loss of fees under the new ETF umbrella. All seven of DFA’s newly minted ETFs have seen net inflows over the past year. The Dimensional U.S. Core Equity 2 ETF (DFAC A) has been the standout, attracting $3.5 billion and reaching $32 billion in total assets. Similarly, the Dimensional U.S. Equity Market ETF (DFUS A) and Dimensional U.S. Small Cap ETF (DFAS B+) have each garnered around $2 billion, now managing $11 billion and $9 billion, respectively. Although responsible for the bulk of inflows into converted funds last year, the firm has essentially wrapped up conversions for the time being.

J.P. Morgan Asset Management has also leveraged its expertise as an active manager to convert eight of its mutual funds into ETFs over the past couple of years. The JPMorgan Equity Focus ETF (JPEF A-), for instance, drew in over $500 million in the past 12 months and now manages $900 million — while the JPMorgan International Research Enhanced Equity ETF (JIRE A) now manages nearly $7 billion in assets.

Fidelity also continues to grow its lineup, with demand for its Fidelity Enhanced Large Cap Core ETF (FELC A-), which was converted in November 2023. The fund now manages nearly $4 billion. Converted funds also retain their original fund’s track record — an added boon for established franchises with long legacies of asset management.

Earlier this year, BlackRock hopped on the bandwagon by announcing plans to convert its BlackRock International Dividend Fund in 2025 and its $1.7 billion BlackRock High Yield Municipal Bond Fund to an active ETF. “Active ETFs are becoming an integral part of investor portfolios around the world, with financial advisors increasingly incorporating them into their models-based practice,” a spokesperson for the world’s largest asset manager said.

“BlackRock’s decision to convert a mutual fund into an ETF underscores this growing demand and our commitment to aligning the strategies we offer with the investment vehicles that best suit our clients’ needs. We continue to see use cases for mutual funds and view ETFs and other investment vehicles as complementary as they often serve different client segments.”

Morgan Stanley just converted two of its flagship equity funds – the $2.6 billion Morgan Stanley Pathway Large Cap Equity Fund and the $470 million Morgan Stanley Pathway Small-Mid Cap Equity Fund – both of which will begin trading next month. Fidelity has just slated two municipal bond funds for conversion to ETFs. Muni bond funds are popular conversion targets due to their tax efficiency and underrepresentation. Morgan Stanley has seen ETF assets rapidly expand with the conversion of two fixed income funds — now the Eaton Vance Total Return Bond ETF (EVTR ) and the Eaton Vance Short Duration Municipal Income ETF (EVSM ). Such conversions have pushed the company’s total ETF assets beyond the $1 billion mark despite being later to the game. Anthony Rochte, Global Head of ETFs at MSIM, emphasized offering clients their traditional income investing approach with the benefits of an ETF structure.

While not entirely swapping out its roster of mutual funds for ETFs, Merrill Lynch aims to replicate its existing mutual funds almost one-to-one, potentially tripling the number of active ETFs offered on its platform.

And the crypto community is now abuzz with Grayscale’s latest filing to convert a multi-crypto fund into an ETF — a move just announced Wednesday — following completed conversions of its bitcoin and Ethereum trusts into spot ETFs earlier this year. Not a mutual fund conversion per se, but the Digital Large Cap Fund currently trades over the counter and holds bitcoin, Ethereum, Solana, Ripple and Avalanche.

Converting a mutual fund to an ETF comes with its own set of operational challenges. It is no simple flip of the switch — rather, a highly customized process that requires careful tailoring and consideration of a fund’s distribution model, tax structure and shareholder base. A recent Deloitte study highlighted several logistical difficulties, especially for clients without brokerage accounts.

Asset managers must reconcile different systems for trading, clearance, settlement and recordkeeping. Shareholders need brokerage arrangements to receive ETF shares, and fractional shares also complicate the picture. Many providers are turning to alternative structures beyond direct conversions, such as mergers, share class exemptions and replications to navigate some of these challenges.

Despite the hurdles, the ever-growing appeal of ETFs will likely prompt many more mutual funds to make the leap to ETFs — whether it be by direct conversions or more subtle variations.

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