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No one would bat an eye if you called 2025 “the year of the ETF.”
The ETF industry grew to roughly $13.5 trillion by the end of last year — 30% year-over-year growth helped by rising markets, sure, but also record net new ETF flows of nearly $1.5 trillion. In the meantime, mutual funds‘ assets grew by 10% to a little more than $31 trillion, but the investment fund class actually saw about $540 billion in outflows last year.
So ignore my earlier statement — I think you’d get quite a few reactions out of the folks representing the mutual fund industry. That’s in part because ETFs’ success in 2025 very much appeared to come at the expense of mutual funds, and in part because we could make the exact same claim every year for a long, long time.
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However, despite bleeding share to their more versatile, tax-efficient and cost-effective ETF brethren for many years, mutual funds are far from a failed asset class. Indeed, mutual funds still boast a number of qualities that make them attractive holdings not just in a bubble, but in the real world where ETFs exist as an alternative.
Let’s take a look at three reasons why you’d still buy mutual funds over ETFs.
1. Mutual funds underperform the S&P 500 … but not all indexes
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cite the oft-repeated S&P Dow Jones Indices’ SPIVA (S&P Indices Versus Active) data showing that the index regularly takes human managers to the woodshed.
Case in point? Looking at data through June 30, 2025 – sorry, full-year 2025 data wasn’t available as of this writing – just 16% of managers of funds that own large-cap stocks have been able to beat the average annual return of the S&P 500 over the trailing 10 years … and that number drops to 12% over the trailing-15-year period.
Here’s the thing: Large-cap strategies involve investing in the most well-known, well-researched, and well-covered stocks on the planet. There is precious little that the broader market doesn’t know about these companies, so there are very few inefficiencies for human managers to exploit.
The disparity isn’t as bad in other categories, however, and active management has done quite well over shorter time periods. For instance:
- 22% of small-cap managers have beaten the S&P Small-Cap 600 over the trailing 10-year period. But that shoots up to 70% over the past three years and about 60% over the past year.
- A little less than 25% of mid-cap managers have topped the S&P MidCap 400 over the trailing 10 years, but that improves to 33% over the -three and more than 60% over the past year.
Where human managers really earn their keep, however, is in fixed income.
Over the trailing-five-year period, for instance, 46% of municipal bond fund managers have beaten the S&P National AMT-Free Municipal Bond Index, about 50% of general investment-grade managers have outdone the iBoxx $ Liquid Investment Grade, 73% of investment-grade short- and intermediate-term bond managers have topped the iBoxx $ Overall 1-5Y Index. And in that latter category, roughly half of all managers have outdone the index over the trailing-10-year period, too.
And a reminder: Those are simply the averages. Some mutual fund managers have built up sterling track records of outperformance across most time frames, even if their contemporaries haven’t.
2. If you want active management, mutual funds are where it’s at
ETFs rose to prominence on the back of cost-efficient index strategies, but the actively managed ETF world is flourishing. From Morningstar:
“Last year, active exchange-traded funds set more records as they continued to gobble assets,” Stephen Welch, senior manager research analyst, Equity Strategies, writes for Morningstar. “They took in roughly $475 billion, or about one-third of all ETF inflows.”
Yet ETFs still offer a fraction of the actively managed options available in the mutual fund world.
“Last year, close to 1,000 active ETFs launched, accounting for 35% of the roughly 2,800 US-domiciled active ETFs,” Welch writes, but “active ETFs still have a long way to go to catch mutual funds, of which there are more than 6,300 U.S.-listed strategies.”
“But Kyle,” you reply as you realize you’re talking to your computer monitor, “aren’t companies about to launch ETF clones of all their mutual funds?”
They might — but it’ll likely take a lot longer than you think.
Vanguard was the first to have an ETF share class of a mutual fund approved — a quarter-century ago. The Vanguard Total Stock Market ETF (VTI) launched in 2001 as the ETF version of Vanguard Total Stock Market Index (VTSAX), followed by several other ETF versions of Vanguard’s popular index funds. But no one has followed since, in large part because Vanguard owned the patent on the structure.
But that patent expired in 2023. Two years later, in late 2025, the Securities and Exchange Commission (SEC) approved Dimensional Fund Advisors’ application to launch ETF shares of 13 of its existing mutual funds. But while that might have poked a hole in the dam, that dam might take years to burst.
“In the background, there’s so much plumbing and infrastructure, making sure things are communicating correctly,” Daniel Sotiroff, senior analyst for ETF and Passive Strategies at Morningstar, said in a Young and the Invested interview. “You have mutual funds that have existed in one way for decades, if not the better part of a century now, and you have ETFs that have existed for 30 some odd years, and they’re completely different systems and now they have to talk to one another.”
Sotiroff goes on to say that there are “relatively few firms” that are in a position to do this and do it well, and “the firms that are — I think of a Dimensional or a Capital Group — they’re usually pretty prudent about what they’re going to put in an ETF. They’re not just going to start slapping the [ETF] wrapper on everything left and right.”
3. Sometimes you have to buy mutual funds … and that’s probably for the best
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If we’re being brutally honest, a big part of why mutual funds haven’t hemorrhaged even more assets is because many investors are forced to own them. Most 401(k)s, 403(b)s, 457s only allow investors to select from a handful of mutual funds.
But again, if we’re being brutally honest, this limitation likely saves many investors from themselves.
By forcing participants to own investment funds instead of individual securities, 401(k)s and other workplace plans are mandating a level of diversification that investors might otherwise avoid, drastically reducing concentration risk.
Moreover, by limiting investments to mutual funds — which don’t trade throughout the day like ETFs do — 401(k)s discourage inexperienced investors from the frequent trading that numerous studies say produces underperformance compared to just buying and holding.
Would it be nice to have it all? Sure. But we’re arguably better off being “stuck” in stodgy old mutual funds.
