Finance

ETFs will soon beat mutual funds among advisor holdings: report

Published

6 months ago

December 17, 2024

Violetastoimenova | E+ | Getty Images

Financial advisors will soon — and for the first time — hold more of their clients’ assets in exchange-traded funds than in mutual funds, according to a new report by Cerulli Associates.

Nearly all advisors use mutual funds and ETFs — about 94% and 90% of them, respectively, Cerulli said in a report issued Friday.

However, advisors estimate that a larger share of client assets (25.4%) will be invested in ETFs in 2026 relative to the share of client assets in mutual funds (24%), according to Cerulli.

If that happens, ETFs would be the “most heavily allocated product vehicle for wealth managers,” beating out individual stocks and bonds, cash accounts, annuities and other types of investments, according to Cerulli.

Currently, mutual funds account for 28.7% of client assets and ETFs, 21.6%, it said.

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ETFs and mutual funds are similar. They’re essentially a legal structure that allows investors to diversify their assets across many different securities like stocks and bonds.

But there are key differences that have made ETFs increasingly popular with investors and financial advisors.

ETFs hold roughly $10 trillion of U.S. assets. While that’s about half the roughly $20 trillion in mutual funds, ETFs have steadily eroded mutual funds’ market share since debuting in the early 1990s.

“ETFs have been attractive for investors for a long time,” said Jared Woodard, an investment and ETF strategist at Bank of America Securities. “There are tax advantages, the expenses are a bit lower and people like the liquidity and transparency.”

Lower taxes and fees

ETF investors can often sidestep certain tax bills incurred annually by many mutual fund investors.

Specifically, mutual fund managers generate capital gains within the fund when they buy and sell securities. That tax obligation then gets passed along each year to all the fund shareholders.

However, the ETF structure lets most managers trade stocks and bonds without creating a taxable event.

In 2023, 4% of ETFs had capital gains distributions, versus 65% of mutual funds, said Bryan Armour, director of passive strategies research for North America at Morningstar and editor of its ETFInvestor newsletter

“If you’re not paying taxes today, that amount of money is compounding” for the investor, Armour said.

'Much of' inflows into ETFs are going to passive funds, says MFS CEO Michael Roberge

Of course, ETF and mutual fund investors are both subject to capital gains taxes on investment profits when they eventually sell their holding.

Liquidity, transparency and low fees are among the top reasons advisors are opting for ETFs over mutual funds, Cerulli said.

Index ETFs have a 0.44% average expense ratio, half the 0.88% annual fee for index mutual funds, according to Morningstar data. Active ETFs carry a 0.63% average fee, versus 1.02% for actively managed mutual funds, Morningstar data show.

Lower fees and tax efficiency amount to lower overall costs for investors, Armour said.

Trading and transparency

Investors can also trade ETFs during the day like a stock. While investors can place a mutual fund order at any time, the trade only executes once a day after the market closes.

ETFs also generally disclose their portfolio holdings once a day, while mutual funds generally disclose holdings on a quarterly basis. ETF investors can see what they’re buying and what has changed within a portfolio with more regularity, experts said.

However, there are limitations to ETFs, experts said.

For one, mutual funds are unlikely to cede their dominance in workplace retirement plans like 401(k) plans, at least any time soon, Armour said. ETFs generally don’t give investors a leg up in retirement accounts since 401(k)s, individual retirement accounts and other accounts are already tax-advantaged.

Additionally, ETFs, unlike mutual funds, are unable to close to new investors, Armour said. This may put investors at a disadvantage in ETFs with niche, concentrated investment strategies, he said. Money managers may not be able to execute the strategy well as the ETF gets more investors, depending on the fund, he said.

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Swiss government proposes tough new capital rules in major blow to UBS

Published

2 days ago

June 6, 2025

Business Finance News

A sign in German that reads “part of the UBS group” in Basel on May 5, 2025.

Fabrice Coffrini | AFP | Getty Images

The Swiss government on Friday proposed strict new capital rules that would require banking giant UBS to hold an additional $26 billion in core capital, following its 2023 takeover of stricken rival Credit Suisse.

The measures would also mean that UBS will need to fully capitalize its foreign units and carry out fewer share buybacks.

“The rise in the going-concern requirement needs to be met with up to USD 26 billion of CET1 capital, to allow the AT1 bond holdings to be reduced by around USD 8 billion,” the government said in a Friday statement, referring to UBS’ holding of Additional Tier 1 (AT1) bonds.

The Swiss National Bank said it supported the measures from the government as they will “significantly strengthen” UBS’ resilience.

“As well as reducing the likelihood of a large systemically important bank such as UBS getting into financial distress, this measure also increases a bank’s room for manoeuvre to stabilise itself in a crisis through its own efforts. This makes it less likely that UBS has to be bailed out by the government in the event of a crisis,” SNB said in a Friday statement.

‘Too big to fail’

UBS has been battling the specter of tighter capital rules since acquiring the country’s second-largest bank at a cut-price following years of strategic errors, mismanagement and scandals at Credit Suisse.

The shock demise of the banking giant also brought Swiss financial regulator FINMA under fire for its perceived scarce supervision of the bank and the ultimate timing of its intervention.

Swiss regulators argue that UBS must have stronger capital requirements to safeguard the national economy and financial system, given the bank’s balance topped $1.7 trillion in 2023, roughly double the projected Swiss economic output of last year. UBS insists it is not “too big to fail” and that the additional capital requirements — set to drain its cash liquidity — will impact the bank’s competitiveness.

At the heart of the standoff are pressing concerns over UBS’ ability to buffer any prospective losses at its foreign units, where it has, until now, had the duty to back 60% of capital with capital at the parent bank.

Higher capital requirements can whittle down a bank’s balance sheet and credit supply by bolstering a lender’s funding costs and choking off their willingness to lend — as well as waning their appetite for risk. For shareholders, of note will be the potential impact on discretionary funds available for distribution, including dividends, share buybacks and bonus payments.

“While winding down Credit Suisse’s legacy businesses should free up capital and reduce costs for UBS, much of these gains could be absorbed by stricter regulatory demands,” Johann Scholtz, senior equity analyst at Morningstar, said in a note preceding the FINMA announcement.

“Such measures may place UBS’s capital requirements well above those faced by rivals in the United States, putting pressure on returns and reducing prospects for narrowing its long-term valuation gap. Even its long-standing premium rating relative to the European banking sector has recently evaporated.”