Rapid Recovery Reverses the Trend

U.S. Distribution Pulse Quarterly  |  3Q 2023

Signs of a Turning Tide

U.S. Distribution Pulse Quarterly | 2Q 2023

September 2023

By Scott Anderson

In the first quarter of 2023, exchange-traded funds (ETFs) saw outflows for the first time since 2020.  But money flows move fast. The second quarter tells a different story. Equities markets have become less volatile, sentiment has improved and fixed income (FI) continues to benefit from higher interest rates. In the Q3 U.S. Distribution Pulse Quarterly webinar, we share data and analysis showing investors are coming back from the sidelines. With this movement, ETFs are once again picking up share.

A Short Season for Mutual Funds


As 2023 has progressed, BNY Mellon Growth DynamicsSM  data is showing the consistent pattern of mutual fund outflows and ETF inflows has returned.


As we observed in “Signs of a Turning Tide (U.S. Distribution Pulse Quarterly  |  2Q 2023),” market uncertainties began to favor mutual funds. However, equities have experienced a rapid recovery. For example, the S&P 500 rose from a March 10, 2023 low of 3861.59 to 4221.02 on May 31, 2023.


As more cash has come back to packaged products at national broker-dealers,            $15 billion returned to the market. While mutual funds lost $10 billion in net sales, ETFs picked up $5 billion, and separately managed accounts (SMAs) picked up $10 billion (or 1.5% growth). 

Figure 1: Net Sales Growth Rates - By Investment Vehicle

Direct Index and Active Drive Growth 


Direct index funds are playing an outsized role in the SMA space, driving 70% of United States equity SMA sales and 21% of all SMA sales. As a result, direct index SMA has achieved a significant two-year CAGR of 30%, even while representing a relatively small proportion of packaged product assets under management (AUM). This outperformance suggests that tax-efficient, flexible custom strategies continue to attract demand.


Active management is also an outsized part of the growth story for ETFs. Over the past two years, active ETF asset growth (5% CAGR) and smart beta (4% CAGR) punched above their weight, compensating for a 1% contraction in index ETFs. Pershing registered investment advisor (RIA) trends are seeing a similar lift, with more active U.S. equity net sales than index. Although active and smart beta represent just over $1 billion in AUM for ETFs, these growth rates demonstrate that advisors and individual investors are expanding their appetite beyond passive strategies. 

Figure 2: Percentage of Fee Based Netflows by Asset Class: National Broker Dealers - 2022

The Persistence of Fixed Income 


Across all three wrappers, FI still dominates. Six of the top ten investment styles are oriented towards debt products.


For example, intermediate core-plus bond and core bond helped curtail overall net sales losses for mutual funds. Taxable fixed income created pockets of mutual fund growth in both rep-as-portfolio manager and firm discretionary programs. Muni fixed income offered a notable growth story for SMAs, with 10% of overall net sales. In addition, government credit net sales in Q2 (2.9% of net sales) exceeded the six previous quarters combined.


The rapid recovery of ETFs, alongside continued growth of active and smart beta ETFs, is good news for investment managers considering new ETF launches or product innovation. The first half of the year may have prompted conservative firms to take a wait-and-see approach to launching new products in order to assess relative performance across wrappers. The consistent growth of ETFs and SMAs (with the exception of ETFs in Q1 2023) could open the door to new products and innovation for both product types.


For the Q3 2023 U.S. Distribution Pulse Quarterly on-demand webcast, click here.

Scott Anderson

Director of Research, BNY Mellon Growth DynamicsSM


*All data is sourced from BNY Mellon Growth Dynamics as of June 30, 2023. The aggregate data used in this analysis is based on Mutual Fund, ETF and SMA asset and sales data reported to BNY Mellon Growth Dynamics under a data sponsor agreement. Data currently representing approximately $3.2 trillion in assets under management with national broker-dealers. The data set represents sales through a financial advisor and excludes institutional and retirement plan sales.


BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used to reference the corporation as a whole and/or its various subsidiaries generally.  This material does not constitute a recommendation by BNY Mellon of any kind.  The information herein is not intended to provide tax, legal, investment, accounting, financial or other professional advice on any matter, and should not be used or relied upon as such.  The views expressed within this material are those of the contributors and not necessarily those of BNY Mellon.  BNY Mellon has not independently verified the information contained in this material and makes no representation as to the accuracy, completeness, timeliness, merchantability or fitness for a specific purpose of the information provided in this material.  BNY Mellon assumes no direct or consequential liability for any errors in or reliance upon this material.


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