The global net assets of Mutual Fund and Exchange Traded Fund (ETF) providers totalled $38 trillion in 2022. Despite its massive size, the industry is dominated by a relatively small number of brands.
Source: Visual Capitalist
Vanguard and iShares (owned by BlackRock) dominate the list and account for 25% of mutual fund and ETF net assets globally. Both have seen strong net inflows, though iShares’ growth rate has been higher recently.
State Street, the fifth-largest fund brand, manages the SPDR S&P 500 ETF, which is the largest ETF in the world with a market cap over $500 billion. It was a top pick for retail investors in early 2023.
The smallest of the giants – T. Rowe Price and Franklin Templeton – both focus on active rather than passive or index management, a strategy designed to outperform the general market through the decisions of investment managers.
We note the shifting preference from Mutual Fund to ETFs, reflecting the trend within the industry as investors in 2022 favoured passive funds and ETFs over mutual funds and active funds, due to higher fees and underperformance of many active funds.
Passive or index funds now comprise 38% of global assets, up from 19% ten years ago in 2013.
Typically, passive funds have very low expense ratios. Existing brands also have large economies of scale that would be difficult for new entrants to replicate. For these reasons, fewer firms compete in passive management and this is ultimately leading to more consolidation in the industry.
On the flip side, it could be argued that industry consolidation reduces financial stability. The US Federal Reserve states that if a large firm experienced a significant event, such as a cybersecurity breach, it could “lead to sudden massive redemptions from that firm’s funds and thus potentially from the asset management industry as a whole.”
Furthermore, as some markets or sectors become excessively priced (e.g. the mega tech company Nvidia, now priced on a PE of 200x), passive or index funds are unable to exclude such high-flyers, whereas actively managed funds can.
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