Chapter Three

US Mutual Funds

A mutual fund is an investment company that pools money from shareholders and invests in a portfolio of securities. An estimated 100 million individual Americans in 56.2 million households owned mutual funds in mid-2017. US households rely on mutual funds to meet long-term personal financial objectives, such as preparing for retirement, saving for education, purchasing a house, or preparing for emergencies. In the past 10 years, net new cash flows to mutual funds totaled $230 billion. Changing demographics and investors’ reactions to US and worldwide economic and financial conditions play important roles in determining how demand for specific types of mutual funds—and for mutual funds in general—evolves.

Mutual Fund Total Net Assets

With $18.7 trillion in total net assets, the US mutual fund industry remained the largest in the world at year-end 2017 (Figure 3.1). The majority of US mutual fund assets at year-end 2017 were in long-term mutual funds, with equity funds alone making up 55 percent of US mutual fund total net assets. Bond mutual funds were the second-largest category, with 22 percent of total net assets. Money market funds (15 percent) and hybrid funds (8 percent) held the remainder.

Figure 3.1

Equity Mutual Funds Held More Than Half of Mutual Fund Total Net Assets

Percentage of total net assets, year-end 2017


Investor Demand for US Mutual Funds

A variety of factors influence investor demand for mutual funds, such as funds’ ability to assist investors in achieving their investment objectives. For example, US households rely on equity, bond, and hybrid mutual funds to meet long-term personal financial objectives, such as preparing for retirement. US households, as well as businesses and other institutional investors, use money market funds as cash management tools because they provide a high degree of liquidity and competitive short-term yields.

Domestic equity mutual funds continued to experience outflows in 2017, likely reflecting an ongoing shift by investors to index-based products. Although domestic equity mutual funds have had net outflows for the past four years, the year-over-year change in the pace of outflows slowed in 2017. Despite the Federal Reserve raising the federal funds target rate three times in 2017, demand for bond mutual funds strengthened, in part because of the aging of the US population. Investor demand also increased for some types of money market funds as yields increased and the effects of recent regulatory reforms stabilized.

Entry and Exit of US Mutual Funds

Mutual fund sponsors create new funds to meet investor demand, and they merge or liquidate those that do not attract sufficient investor interest. A total of 464 mutual funds opened in 2017 (Figure 3.2), up modestly from the previous year, in part because of an increase in the number of new offerings of domestic equity and world equity mutual funds. The total number of mutual funds that exited the industry dipped slightly in 2017, as fewer domestic equity and money market funds were liquidated, essentially offsetting an increase in the number of merged funds.

Figure 3.2

Number of Mutual Funds Entering and Exiting the Industry



Note: Data include mutual funds that do not report statistical information to the Investment Company Institute and mutual funds that invest primarily in other mutual funds.

Investors in US Mutual Funds

Demand for mutual funds is, in part, related to the types of investors who hold mutual fund shares. Retail investors (i.e., households) held the vast majority (90 percent) of the $18.7 trillion in US mutual fund total net assets at year-end 2017 (Figure 3.3). The proportion of long-term mutual fund total net assets held by retail investors is even higher (95 percent). Retail investors also held substantial money market fund assets ($1.8 trillion), but that amounts to a relatively small share (10 percent) of their total mutual fund assets.

In contrast, institutional investors such as nonfinancial businesses, financial institutions, and nonprofit organizations held a relatively small portion of mutual fund assets. At year-end 2017, institutions held 10 percent of mutual fund total net assets. The majority (57 percent) of the $1.9 trillion that institutions held in mutual funds was in money market funds, because one of the primary reasons institutions use mutual funds is to help manage their cash balances.

Figure 3.3

Households Held 90 Percent of Mutual Fund Total Net Assets

Trillions of dollars, year-end 2017


1 Mutual funds held as investments in individual retirement accounts, defined contribution retirement plans, variable annuities, 529 plans, and Coverdell education savings accounts are counted as household holdings of mutual funds.

2 Long-term mutual funds include equity, bond, and hybrid mutual funds.

Note: Components may not add to the totals because of rounding.

Developments in Mutual Fund Flows

Overall demand for mutual funds as measured by net new cash flow—new fund sales less redemptions plus net exchanges—rebounded in 2017 (Figure 3.4), following two consecutive years of outflows. In 2017, mutual funds had inflows of $174 billion (1.1 percent of year-end 2016 total net assets), following outflows of $227 billion in 2016. Increased investor demand for world equity, bond, and money market funds offset continued outflows from domestic equity mutual funds. Investors purchased $67 billion, on net, of long-term mutual funds in 2017, and $107 billion, on net, of money market funds. A number of factors—including broad-based gains in financial markets, ongoing demographic trends, and increased demand for indexed products—appeared to influence long-term mutual fund flows in 2017. Inflows to money market funds were likely driven by the Federal Reserve’s decision to increase the federal funds rate three times in 2017.

Figure 3.4

Net New Cash Flow to Mutual Funds

Billions of dollars; annual, 2008–2017


* In 2012, investors withdrew less than $500 million from money market funds.

Note: Components may not add to the total because of rounding.

The Global Economy and Financial Markets in 2017

Economic activity picked up in the United States in 2017 with real gross domestic product (GDP) expanding at a 2.6 percent rate, up from 1.8 percent in 2016. A couple of major items contributed to the acceleration in GDP growth. Businesses increased their investment in factories and machinery as economic activity accelerated around the globe in 2017, and the prospect for continued global economic growth strengthened. At the same time, US households increased their spending on durable goods, likely reflecting higher levels of consumer confidence, strong gains in stock prices, and a modest uptick in wages.

A variety of metrics indicated that the US economy continued to improve in 2017. The labor market continued to strengthen, with the unemployment rate dropping from 4.7 percent at year-end 2016 to 4.1 percent at year-end 2017. In addition, average hourly earnings, which had lagged job growth through most of the recovery from the 2007–2009 financial crisis, rose 2.7 percent in 2017. Strong growth in domestic stock prices and house prices fueled an 8 percent increase in US household net worth in 2017. The Wilshire 5000 index returned 19 percent and the S&P CoreLogic Case-Shiller US National Home Price Index rose 6.3 percent. The December 2017 level of the home price index indicated that house prices had surpassed their previous peak in 2006.

Strengthening economic growth prompted the Federal Reserve to increase the federal funds rate three times in 2017. This tightening in monetary policy was widely expected, so the quarter-point moves in short-term rates in March, June, and December 2017 had little impact on the markets. The decision to raise the federal funds rate was made easier by moderate inflation. The Consumer Price Index rose 2.1 percent in 2017, as it did in 2016, which is close to Federal Reserve’s target of 2 percent inflation. The yield on the 10-year Treasury fluctuated somewhat during the year, but ultimately ended 2017 only 5 basis points* below where it began.

* Basis points simplify percentages written in decimal form. A basis point equals one-hundredth of 1 percent (0.01 percent), so 100 basis points equals 1 percentage point.

The rest of the world also saw an increase in economic activity, with global GDP expanding by 3.8 percent in 2017, up from 3.2 percent in 2016. Advanced economies collectively grew 2.3 percent in 2017, while emerging markets grew 4.8 percent. Most geographic regions of the world posted higher levels of GDP growth in 2017 relative to 2016. As a region, Europe reported GDP growth of 2.4 percent in 2017, up from 1.7 percent in 2016. Within Europe, Russia’s economy grew 1.5 percent in 2017, after contracting by 0.2 percent in 2016. In Western Europe, other large economies such as France and Germany reported increases in GDP. On average, Asian economies continued to expand as well, with Japan posting GDP growth of 1.7 percent in 2017, up from 0.9 percent in 2016. China reported a slight improvement in economic growth in 2017—6.9 percent, up from 6.7 percent in 2016. South America as a whole also posted positive economic growth of 0.7 percent in 2017, a sharp rebound from a 2.4 percent contraction in 2016. In 2017, both Argentina (2.9 percent) and Brazil (1.0 percent) reported positive economic growth after their economies contracted in 2016 by 1.8 percent and 3.5 percent, respectively.

Monetary policies varied around the globe. Central banks in Europe and Japan maintained existing accommodative policies, while the Bank of England and the US Federal Reserve began to increase their respective headline interest rates. The Federal Reserve’s more aggressive monetary policy stance, however, was not enough to offset depreciation of the US dollar,* which declined 7.0 percent over the year. The depreciation of the dollar provided a boost to American exports in 2017, which contributed to the increase in reported 12-month earnings per share for the S&P 500 to $110 in 2017 from $95 in 2016.

* As measured by the Trade Weighted US Dollar Index: Broad.

Global stock markets marched higher in 2017, buoyed by a positive outlook for the pace of economic activity, reduced concern about deflationary pressure, and historically low volatility. In the United States, the S&P 500 advanced 19 percent, while the NASDAQ Composite Index gained 28 percent. In the United Kingdom, the Financial Times Stock Exchange (FTSE) 100 Index was up almost 8 percent for the year, and in Germany, the Deutscher Aktienindex (DAX) rose about 13 percent. The MSCI Emerging Markets Index indicated that stock prices in emerging market countries jumped 34 percent in 2017.

Long-Term Mutual Fund Flows

Net new cash flows into long-term mutual funds, though correlated with market returns, tend to be moderate as a percentage of total net assets even during episodes of market turmoil. Several factors may contribute to this phenomenon. One factor is that households (i.e., retail investors) own the vast majority of US long-term mutual fund assets (Figure 3.3). Retail investors generally respond less strongly to market events than do institutional investors. Most notably, households often use mutual funds to save for the long term, such as for college or retirement. Many of these investors make stable contributions through periodic payroll deductions, even during periods of market stress. In addition, many long-term fund shareholders seek the advice of financial advisers, who may provide a steadying influence during market downturns. These factors are amplified by the fact that assets in mutual funds are spread across 100 million investors and that fund investors have a wide variety of individual characteristics (such as age or appetite for risk) and goals (such as saving for the purchase of a home, for education, or for retirement). They also are bound to have a wide range of views on market conditions and how best to respond to those conditions to meet their individual goals. As a result, even during months when funds as a whole see net outflows, some investors continue to purchase fund shares.

Equity Mutual Funds

Flows to equity mutual funds tend to rise and fall with stock prices (Figure 3.5). The MSCI All Country World Daily Gross Total Return Index, a measure of returns on global stock markets, increased 24.6 percent in 2017, following an 8.5 percent increase in 2016. Despite strong stock market performance around the globe, equity mutual funds experienced net outflows totaling $160 billion in 2017 (or 1.9 percent of December 2016 total net assets), on the heels of $258 billion in net outflows in 2016. The outflows in equity mutual funds were concentrated in domestic equity funds.

Figure 3.5

Net New Cash Flow to Equity Mutual Funds Typically Is Related to World Equity Returns

Monthly, 2002–2017


1 Net new cash flow is the percentage of previous month-end equity mutual fund total net assets, plotted as a six-month moving average.

2 The total return on equities is measured as the year-over-year percent change in the MSCI All Country World Daily Gross Total Return Index.

Sources: Investment Company Institute, MSCl, and Bloomberg

With the exception of February and May, equity mutual funds had net outflows in every month in 2017 (Figure 3.6). In the first three months of the year, investors had redeemed, on net, only $18 billion from equity funds. Flows to mutual funds, in general, tend to be higher in the first quarter than at other times of the year because investors who receive year-end bonuses may invest that money relatively quickly in the new year. In addition, some investors wait to make contributions to their individual retirement accounts (IRAs) before filing their tax returns. As the year progressed, net outflows from equity mutual funds accelerated, with investors redeeming, on net, $142 billion from April through December.

Although major US stock indexes hit record highs in 2017, domestic equity mutual funds had net outflows of $236 billion in 2017 (Figure 3.6). Volatility does not appear to have been a major factor in the outflows, as the equity market was quiet during 2017. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which tracks the volatility of the S&P 500 index, is a widely used measure of market risk. Values greater than 30 typically reflect a high degree of investor fear and values less than 20 are associated with a period of market calm. During 2017, the daily VIX average was near a historical low of 11, with the peak at 16 in mid-August.

Figure 3.6

Net New Cash Flow to Equity Mutual Funds in 2017

Billions of dollars; monthly, January–December 2017


Note: Components may not add to the total because of rounding.

Rather than volatility, net outflows from domestic equity mutual funds appear to have been driven by investor demand for domestic equity exchange-traded funds (ETFs). As discussed in chapter 4, demand for ETFs has been very strong over the past several years. Domestic equity ETFs had net redemptions in only a single month, May 2017. Overall, demand for domestic equity ETFs resulted in $186 billion in net share issuance in 2017 (Figure 4.8). In contrast, domestic equity mutual funds had net redemptions of $236 billion over the same period.

Demand for world equity mutual funds strengthened in 2017, with investors purchasing $77 billion (Figure 3.6), on net, up from net redemptions of $23 billion in 2016. Throughout 2017, world equity funds received fairly steady inflows—most of which went to international equity funds.

A few developments may have attracted investors to world equity mutual funds in 2017. First, economic activity increased around the globe, including in emerging markets. In 2017, countries in Europe, Asia, and South America all reported levels of economic activity that surpassed their respective 2016 levels, without meaningful increases in inflation. Second, the growth between 2012 and 2017 in the prices of US stocks has made international equities look relatively attractive on a price-earnings basis. Third, and perhaps most important, the US dollar depreciated in 2017, reversing its gains from the previous year. Depreciation of the US dollar generally makes foreign investment more attractive to US investors, because it increases the rate of return US investors earn on their holdings of foreign securities.

Another factor that likely contributed to boosting flows to world equity mutual funds is that some types of funds, such as target date mutual funds (discussed in more detail here), rebalance portfolios automatically as part of an asset allocation strategy. The assets in funds offering asset allocation strategies have grown considerably over the past decade. These funds typically held higher weights in foreign equities and bonds than many US investors had traditionally allocated to foreign investments. In addition, as the US domestic equity market rose over the past several years, these kinds of asset allocation funds rebalanced their portfolios away from domestic stocks toward foreign stocks.

Asset-Weighted Turnover Rate

The turnover rate—the percentage of a fund’s holdings that have been bought or sold over a year—is a measure of a fund’s trading activity. The rate is calculated by dividing the lesser of purchases or sales (excluding those of short-term assets) in a fund’s portfolio by average net assets.

To analyze the turnover rate that shareholders actually experience in their funds, it is important to identify those funds in which shareholders are most heavily invested. Neither a simple average nor a median takes into account where fund assets are concentrated. An asset-weighted average gives more weight to funds with more assets, and accordingly, indicates the average portfolio turnover actually experienced by fund shareholders. In 2017, the asset-weighted annual turnover rate experienced by equity mutual fund investors was 30 percent, well below the average of the past 34 years (Figure 3.7).

Investors tend to own equity funds with relatively low turnover rates. In 2017, about half of equity mutual fund total net assets were in funds with portfolio turnover rates of less than 23 percent. This reflects the propensity for mutual funds with below-average turnover to attract shareholder dollars.

Figure 3.7

Turnover Rate Experienced by Equity Mutual Fund Investors


Note: The turnover rate is an asset-weighted average. Data exclude mutual funds that invest primarily in other mutual funds.

Bond Mutual Funds

Bond fund flows typically are correlated with the performance of US bonds (Figure 3.8), which, in turn, is largely driven by the US interest rate environment. long-term interest rates fluctuated in 2017, but finished the year only 5 basis points below where they started. The 10‑year Treasury began 2017 at 2.45 percent, and declined 14 basis points by June 30. Over the same period, the total return on bonds fell to zero. During the second half of 2017, long-term interest rates increased, and finished the year at 2.40 percent. Despite the modest increase in interest rates during the second half of the year, bond mutual funds received positive net new cash flows in every month. In 2017, bond mutual funds had net inflows of $260 billion, more than double the $107 billion in net inflows received in 2016.

Figure 3.8

Net New Cash Flow to Bond Mutual Funds Typically Is Related to Bond Returns

Monthly, 2002–2017


1 Net new cash flow is the percentage of previous month-end bond mutual fund total net assets, plotted as a three-month moving average. Data exclude high-yield bond mutual funds.

2 The total return on bonds is measured as the year-over-year percent change in the Citi US Broad Investment Grade Corporate Bond Index.

Sources: Investment Company Institute, Citigroup, and Bloomberg


Fund Investors Will “Run”? Sorry, Charlie Brown

During the first half of 2017, when long-term interest rates were declining, taxable bond funds received $121 billion in net inflows (Figure 3.9). During the second half of the year, investors added $113 billion, on net, to taxable bond mutual funds even though long-term interest rates were moving up.

Investor demand varied across specific categories of taxable bond mutual funds in 2017. Investment grade bond funds (and multisector bond funds) were the most sought after, receiving $202 billion of net inflows in 2017, while investors redeemed $17 billion from high-yield bond funds in 2017. World bond funds, which typically hold a mix of bonds denominated in US dollars and foreign currencies, saw net inflows of $47 billion. These inflows were, in part, attributable to a weaker US dollar. Depreciation of the US dollar increases dollar returns on bonds denominated in foreign currencies, and makes it less expensive for foreign companies to pay off their dollar-denominated debts.

Demand for municipal bond funds was fairly steady through the first 11 months of 2017, with inflows amounting to $28 billion, before turning slightly negative in December (Figure 3.9).

Figure 3.9

Net New Cash Flow to Bond Mutual Funds in 2017

Billions of dollars; monthly, January–December 2017


Note: Components may not add to the total because of rounding.

How Bond Mutual Funds Manage Investor Flows

Since the 2007–2009 financial crisis, some observers have expressed concerns that outflows from bond mutual funds could pose challenges for fixed-income markets. There are many reasons to believe such concerns are overstated.

First, although US bond mutual fund total net assets have risen in the past decade, they were only 11 percent of the US bond market (US government bonds, corporate bonds, and tax-exempt bonds) in December 2017, up from 7 percent at year-end 2007. This means that 89 percent of the US bond market is held by investors outside of mutual funds.

Second, bond mutual fund managers have means of meeting redemption requests other than selling bonds. Each day, bond mutual funds receive cash in the form of interest income from bonds held in the portfolio and proceeds from matured bonds. Also, mutual funds in general have cash coming in from new sales of fund shares on any given day. Bond fund managers can often fulfill the vast majority of redemption requests using these cash sources.

In addition, bond fund managers employ a wide range of strategies to prepare to meet shareholder redemptions, including holding short-term assets or using derivatives. Derivatives can be more liquid than their physical counterparts, and funds are required to segregate liquid assets to support their derivatives positions. As these positions are closed, this cash collateral provides a ready source of liquidity to meet redemptions. This is especially true for many funds commonly referred to as liquid alternative funds, which are explicitly designed to allow frequent investor trading, and do so in large measure through the use of derivatives.

Finally, when meeting redemptions, managers use a nuanced approach in their bond trading, with their actions guided by market conditions, expected investor flows, and other factors. For example, during a market downturn, a manager might determine that the fund can add shareholder value by buying some less-liquid bonds. With liquidity at a premium, the manager might judge that the prices of such bonds are depressed relative to their fundamental values and thus represent a buying opportunity. On the other hand, the fund might seek to add shareholder value by selling some of its more-liquid bonds (which, being in high demand, are trading at a premium to fundamental value). Other fund managers may conclude that it is necessary and appropriate to meet outflows by selling a “slice” of the fund’s portfolio.

Despite several periods of market turmoil, bond mutual funds have experienced net inflows through most of the past decade. Bond mutual funds received $2.2 trillion in net inflows and reinvested dividends from 2008 through 2017 (Figure 3.10). A number of factors have helped sustain this long-term demand for bond mutual funds.

Figure 3.10

Bond Mutual Funds Have Experienced Net Inflows Through Most of the Past Decade

Cumulative flows to bond mutual funds, billions of dollars; monthly, January 2008–December 2017


Note: Bond mutual fund data include net new cash flow and reinvested dividends.


Revised Fed Data Show Mutual Funds’ Share of Corporate Bond Market Is Small and Stable

Demographics influence the demand for bond mutual funds. Older investors tend to have higher account balances because they have had more time to accumulate savings and take advantage of compounding. At the same time, as investors age, they tend to shift toward fixed-income products. Over the past decade, the aging of Baby Boomers has boosted flows to bond funds. Although net outflows from bond funds would have been expected when long-term interest rates rose over the second half of 2017, they were likely mitigated, in part, by the demographic factors that have supported bond fund flows over the past decade.

The continued popularity of target date mutual funds also likely helped to limit outflows from bond mutual funds in 2017. Target date funds invest in a changing mix of equities and fixed-income investments. As the fund approaches and passes its target date (which is usually specified in the fund’s name), the fund gradually reallocates assets from equities to fixed-income investments, including bonds. Target date funds usually invest through a fund-of-funds approach, meaning they primarily hold and invest in shares of other equity and bond funds or ETFs. Over the past 10 years, target date mutual funds have received net inflows of $521 billion. In 2017, target date mutual funds had net inflows of $68 billion and ended the year with assets of $1.1 trillion. The growing investor interest in these funds likely reflects their automatic rebalancing features as well as their inclusion as an investment option in many defined contribution (DC) plans. The adoption of the Pension Protection Act of 2006 and the Department of Labor’s regulations including target date funds as qualified default investments for DC plans also contributed to their growth.


Simulating a Crisis

Hybrid Mutual Funds

Over the past few years, investors have moved away from hybrid mutual funds, which had been a popular way to help investors achieve a managed, balanced portfolio of stocks and bonds (Figure 3.11). In 2017, hybrid mutual funds had negative net new cash flow of $34 billion (or 2.4 percent of prior year-end assets), following $46 billion in outflows in 2016 and $21 billion in 2015. Many factors likely contribute to this change in the use of hybrid funds. Investors may be, for example, shifting out of hybrid funds and into portfolios of ETFs that are periodically rebalanced, often with the assistance of a fee-based financial adviser. In addition, investors may be shifting assets toward target date funds and lifestyle funds as an alternative way to achieve a balanced portfolio. For example, in 2017, assets in target date funds reached $1.1 trillion, up $229 billion from year-end 2016 (Figure 8.26).*

* ICI generally excludes funds of funds from total net asset and net new cash flow calculations to avoid double counting. Although target date funds are classified as hybrid funds by ICI, 99 percent of target date fund assets are in funds of funds, and therefore their flows are excluded from the hybrid mutual fund flows presented in Figure 3.11.

Figure 3.11

Net New Cash Flow to Hybrid Mutual Funds

Billions of dollars; annual, 2008––2017


Hybrid funds (also called asset allocation funds or balanced funds) invest in a mix of stocks and bonds. This approach offers a way to balance the potential capital appreciation of stocks with the income and relative stability of bonds over the long term. The fund’s portfolio may be periodically rebalanced to bring the fund’s asset allocation more in line with prospectus objectives, which could be necessary following capital gains or losses in the stock or bond markets.

Net outflows from hybrid funds over the 2015–2017 period were concentrated in flexible portfolio funds, which can hold any proportion of stocks, bonds, cash, and commodities, both in the United States and overseas. Following the 2007–2009 financial crisis, many investors sought to broaden their portfolios and lower the correlation of their investments with the market or limit downside risk. Flexible portfolio funds can help investors achieve those goals. As a result, flexible portfolio funds saw net inflows of $88 billion between 2009 and 2014. However, after a long bull market and comparably lower returns in funds offering downside protection, investors have redeemed, on net, almost $76 billion from flexible portfolio funds in the past three years.

The Growth of Other Investment Products

Some of the outflows from long-term mutual funds in 2017 reflect a broader shift, driven by both investors and retirement plan sponsors, toward other pooled investment vehicles. This trend is reflected in the outflows from actively managed funds and the growth of index mutual funds, ETFs, and collective investment trusts (CITs) since 2007.

In 2017, index mutual funds—which hold all (or a representative sample) of the securities in a specified index—remained popular with investors. Of households that owned mutual funds, 38 percent owned at least one equity index mutual fund in 2017. As of year-end 2017, 453 index mutual funds managed total net assets of $3.4 trillion. For 2017 as a whole, investors added $223 billion in net new cash flow to these funds (Figure 3.12). Of the new money that flowed to index mutual funds, 32 percent was invested in funds tied to domestic stock indexes, 44 percent was invested in funds tied to bond or hybrid indexes, and the remainder (about 25 percent) went to funds tied to world stock indexes. Assets in index equity mutual funds made up 26.6 percent of all equity mutual fund assets in 2017 (Figure 3.13).

Figure 3.12

Net New Cash Flow to Index Mutual Funds

Billions of dollars; annual, 2008––2017


Note: Components may not add to the total because of rounding.

Figure 3.13

Index Equity Mutual Funds’ Share Continued to Rise

Percentage of equity mutual funds’ total net assets; year-end, 2008–2017


Index domestic equity mutual funds and index-based ETFs have particularly benefited from increased investor demand for index-based investment products. From 2008 through 2017, index domestic equity mutual funds and ETFs received $1.6 trillion in net new cash and reinvested dividends, while actively managed domestic equity mutual funds experienced a net outflow of $1.3 trillion (including reinvested dividends) (Figure 3.14). Index domestic equity ETFs have grown particularly quickly—attracting more than one and a half times the net inflows of index domestic equity mutual funds since 2008. Part of the recent increasing popularity of ETFs is likely attributable to more brokers and financial advisers using them in their clients’ portfolios. In 2016, full-service brokers and fee-based advisers had 14 percent and 24 percent, respectively, of their clients’ household assets invested in ETFs, up from 6 percent and 10 percent in 2011 (Figure 3.15).

Figure 3.14

Some of the Outflows from Domestic Equity Mutual Funds Have Gone to ETFs

Cumulative flows to domestic equity mutual funds and net share issuance of index domestic equity ETFs,* billions of dollars; monthly, January 2008–December 2017


* Prior to October 2009, index domestic equity ETF data include a small number of actively managed domestic equity ETFs.

Note: Equity mutual fund data include net new cash flow and reinvested dividends.

Figure 3.15

Fee-Based Advisers Are Driving Larger Portions of Client Portfolios Toward ETFs

Percentage of household assets invested in investment category by adviser type, 2011 and 2016


1 This category includes wirehouses as well as regional, independent, and bank broker-dealers.

2 This category includes registered investment advisers and dually registered investment adviser broker-dealers.

3 This category excludes an unknown portion of assets from investors who received fee-based advice but implemented trades themselves through discount brokers and fund supermarkets.

Source: Cerulli Associates, “The State of US Retail and Institutional Asset Management, 2017”

CITs are an alternative to mutual funds for DC plans. Like mutual funds, CITs pool the assets of investors and (either actively or passively) invest those assets according to a particular strategy. Much like institutional share classes of mutual funds, CITs generally require substantial minimum investment thresholds, which can limit the costs of managing pooled investment products. Unlike mutual funds, which are regulated under the Investment Company Act of 1940, CITs are regulated under banking laws and are not marketed as widely as mutual funds; this can also reduce their operational and compliance costs as compared with mutual funds.

More retirement plan sponsors have begun offering CITs as options in 401(k) plan lineups. As Figure 3.16 demonstrates, this trend has translated into a growing share of assets held in CITs by large 401(k) plans. That share increased from 6 percent in 2000 to an estimated 19 percent in 2016. This recent expansion is due, in part, to the growth in target date fund CITs.

Figure 3.16

Assets of Large 401(k) Plans Are Increasingly Held in Collective Investment Trusts

Percentage of assets in 401(k) plans with 100 participants or more, selected years


Note: Assets exclude Direct Filing Entity assets that are reinvested in collective investment trusts. Data prior to 2016 come from the Form 5500 Research data sets released by the Department of Labor. Data for 2016 are preliminary, based on Department of Labor 2016 Form 5500 latest data sets.

Source: Investment Company Institute tabulations of Department of Labor Form 5500 data

Money Market Funds

In 2017, money market funds received $107 billion in net new cash flows (Figure 3.17). Prime money market funds received the bulk of the inflows ($76 billion), followed by government money market funds with $30 billion in inflows. The increased demand for money market funds likely stems from the Federal Reserve’s decision to raise the federal funds target rate three times in 2017, which increased the attractiveness of money market funds as an investment for excess cash. Yields on prime and government money market funds ratcheted up in 2017 and far exceeded the stated rate on money market deposit accounts (MMDAs) (Figure 3.18).

Figure 3.17

Net New Cash Flow to Money Market Funds

Billions of dollars; monthly, January–December 2017


1 In January, February, and March 2017, tax-exempt money market funds had net inflows or outflows of less than $500 million.

2 In December 2017, prime money market funds had net outflows of less than $500 million.

Note: Components may not add to the total because of rounding.

Figure 3.18

Net Yields of Money Market Funds Far Exceeded MMDA Rates by the End of 2017

Percent; month-end, January 2015–December 2017


1 The money market deposit account (MMDA) rate is calculated based on a simple average of rates paid on high-yield savings accounts by all insured depository institutions and branches for which data are available.

2 Net yields of money market funds are annualized seven-day compound net yields.

Sources: iMoneyNet, Bank Rate Monitor, and Federal Deposit Insurance Corporation