Chapter Three

US Mutual Funds

A mutual fund is an investment company that pools money from shareholders and invests in a portfolio of securities. In 2018, an estimated 99.5 million individual Americans in 56.0 million households owned mutual funds, relying on them to meet long-term personal financial objectives, such as preparing for retirement, saving for education, purchasing a house, or preparing for emergencies. Mutual funds had net redemptions of $191 billion in 2018, or 1.0 percent of year-end 2017 total net assets. 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 $17.7 trillion in total net assets, the US mutual fund industry remained the largest in the world at year-end 2018. The majority of US mutual fund net assets at year-end 2018 were in long-term mutual funds, with equity funds alone making up 52 percent of US mutual fund net assets (Figure 3.1). Bond mutual funds were the second-largest category, with 23 percent of net assets. Money market funds (17 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 2018


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 net outflows in 2018, likely reflecting the decline in US equity markets and an ongoing shift by investors to other index-based products. In addition, demand for certain types of bond mutual funds weakened as the Federal Reserve elected to raise the federal funds target rate four times in 2018. The increases in the federal funds rate led to higher demand for money market funds as the yields on short-term assets became more competitive.

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 345 mutual funds opened in 2018 (Figure 3.2). Fewer equity and taxable bond fund launches contributed to the decline in the number of new mutual funds offered from 2017 to 2018. During the same time, the number of mutual funds that were either merged or liquidated also decreased.

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 (89 percent) of the $17.7 trillion in US mutual fund net assets at year-end 2018 (Figure 3.3). The proportion of long-term mutual fund net assets held by retail investors is even higher (95 percent). Retail investors also held substantial money market fund net assets ($1.9 trillion), but that amounts to a relatively small share (12 percent) of their total mutual fund net assets.

In contrast, institutional investors such as nonfinancial businesses, financial institutions, and nonprofit organizations held a relatively small portion of mutual fund net assets. At year-end 2018, institutions held 11 percent of mutual fund net assets (Figure 3.3). The majority (58 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 89 Percent of Mutual Fund Total Net Assets

Trillions of dollars, year-end 2018


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.

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—weakened considerably in 2018 (Figure 3.4). In 2018, mutual funds had net outflows of $191 billion (1.0 percent of year-end 2017 total net assets), following net inflows of $179 billion in 2017. Long-term mutual funds experienced net outflows of $350 billion in 2018, which were primarily concentrated in domestic equity and hybrid mutual funds. Money market funds received $159 billion in net inflows, which were likely driven by the Federal Reserve’s decision to increase the federal funds rate four times in 2018. A number of factors—including broad-based declines in global financial markets, ongoing demographic trends, and increased demand for indexed products—appeared to influence US mutual fund flows in 2018.

Figure 3.4

Net New Cash Flow to Mutual Funds

Billions of dollars, annual


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

The Global Economy and Financial Markets in 2018

The year proved to be challenging for financial markets and the global economy. Although global gross domestic product (GDP) grew at an estimated rate of 3.7 percent in both 2017 and 2018, concerns about international trade caused the International Monetary Fund (IMF) to revise its expectations for future economic growth downward. Economic activity picked up in the United States in 2018, with real GDP expanding at a 3.0 percent rate—up from 2.5 percent in 2017—but growth in other countries and regions began to slow. Europe, for example, saw economic growth decline from 2.5 percent in 2017 to an estimated 2.2 percent in 2018. Asia experienced a similar deceleration in economic activity, with real GDP declining from 5.7 percent in 2017 to an estimated 5.5 percent in 2018.

Despite the unevenness of global economic growth, a variety of metrics indicated that the US economy continued to improve in 2018. The labor market had sustained improvement, with the unemployment rate dropping from 4.1 percent at year-end 2017 to 3.9 percent at year-end 2018. In addition, average hourly earnings rose 3.3 percent in 2018. The Consumer Price Index rose 1.9 percent in 2018—down slightly from 2.1 percent in 2017—but remained close to the Federal Reserve’s target of 2 percent inflation.

The strength of economic growth in the United States prompted the Federal Reserve to increase the federal funds rate four times in 2018. Although this tightening in monetary policy was widely expected, forward guidance issued by the Federal Reserve left market participants unsure about the scope of future interest rate hikes and monetary policy. The four quarter-point increases in short-term rates in March, June, September, and December 2018, combined with falling yields at the longer end of the Treasury term structure, caused the Treasury yield curve—the difference between the yields on long-term Treasury notes and short-term Treasury bills—to flatten toward the end of the year. Typically, some market participants view this development as a signal of a looming recession.

All of these events combined to roil US financial markets in 2018. Equity markets experienced spikes in volatility both early and late in the year following a prolonged period of calm, during which central banks around the world had been providing accommodative monetary policy in the aftermath of the global financial crisis of 2007–2009. In late September 2018, US stock prices were up nearly 10 percent, but ultimately finished 2018 down 7 percent.* The yield on the 10-year Treasury mirrored the performance of equity markets, rising from its January lows during the first part of the year, before falling almost 40 basis points in the fourth quarter of 2018.

* As measured by the Wilshire 5000 Price Index.
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 performance of stock markets around the world in 2018 reflected similar concerns about international trade and global economic growth. In the United Kingdom, the Financial Times Stock Exchange (FTSE) 100 Index was down almost 13 percent for the year, while in Germany, the Deutscher Aktienindex (DAX) fell about 18 percent. In China, the Shanghai Composite Index was down nearly 25 percent, and the broader MSCI Emerging Markets Index indicated that stock prices in emerging market countries fell about 17 percent.

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 mutual 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 net assets in mutual funds are spread across nearly 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, many investors continue to purchase fund shares.

Equity Mutual Funds

Net new cash 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, decreased 9 percent in 2018, following a 25 percent increase in 2017. With the decline in stock market performance around the globe, equity mutual funds experienced net outflows totaling $261 billion in 2018 (less than 3 percent of year-end 2017 total net assets), compared with $159 billion in net outflows in 2017. In both years, outflows from equity mutual funds were concentrated in domestic equity funds.

With the exception of March, equity mutual funds had net outflows in every month in 2018 (Figure 3.6). In the first three months of the year, investors had redeemed, on net, only $15 billion from equity mutual 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, $245 billion from April through December.

Figure 3.5

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



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

Although several major stock indexes hit record highs during the year, they also slid precipitously, particularly in the fourth quarter. Two spikes in volatility over the course of the year likely contributed, in part, to outflows in equity funds. 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. The daily VIX was higher than 30 in both early February and late December and was higher than 20 for much of 2018 (almost 24 percent of the trading days). By comparison, the 2017 peak of the VIX was 16.

Figure 3.6

Net New Cash Flow to Equity Mutual Funds in 2018

Billions of dollars; monthly, 2018


* In March 2018, equity mutual funds had net inflows of less than $500 million.


From December Outflows to January Inflows: Seasonal Factors in Mutual Fund Flows

In addition to volatility, net outflows from domestic equity mutual funds in 2018 also may 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 two months in 2018, February and March. Overall, demand for domestic equity ETFs resulted in $139 billion in net share issuance in 2018 (Figure 4.9). In contrast, domestic equity mutual funds had net redemptions of $253 billion (Figure 3.6) over the same period.

Demand for world equity mutual funds weakened as well in 2018, with investors redeeming $7 billion (Figure 3.6), on net, down from net purchases of $77 billion in 2017. Flows to world equity mutual funds in 2018 seemed to depend on a fund’s investment objective. Global equity mutual funds, which usually hold US stocks, saw almost $36 billion in net outflows in 2018, while international equity mutual funds, which help investors diversify away from US stocks, saw approximately $33 billion in net inflows. In addition, emerging market equity mutual funds received $3 billion in net inflows in 2018.

Investors may have been attracted to international equity mutual funds in 2018 for a variety of reasons. First, the growth between 2012 and 2018 in the prices of US stocks has made international equities look relatively attractive on a price-earnings basis. Second, some types of funds rebalance portfolios automatically as part of an asset allocation strategy. The assets in funds offering asset allocation strategies—such as target date funds (discussed in more detail on page 70)—have grown considerably over the past decade. These funds typically hold 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.


Even in Bear Markets, Equity Fund Investors Stay the Course

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 total 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 net assets, and accordingly, indicates the average portfolio turnover actually experienced by fund shareholders. In 2018, the asset-weighted annual turnover rate experienced by equity mutual fund investors was 32 percent, well below the average of the past 35 years (Figure 3.7).

Investors tend to own equity funds with relatively low turnover rates. In 2018, about half of equity mutual fund total net assets were in funds with portfolio turnover rates of less than 25 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.

Bond Mutual Funds

Bond mutual fund net new cash 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 2018, finishing the year about 30 basis points higher than at the beginning of the year. The 10-year Treasury started 2018 at 2.40 percent and rose 65 basis points by September 30. Over the same period, the total return on bonds fell below zero. Long-term interest rates continued to increase through early November of 2018 but fell sharply late in the fourth quarter, finishing the year at 2.69 percent.

Figure 3.8

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



1Net 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 FTSE US Broad Investment Grade Bond Index.

Sources: Investment Company Institute, FTSE Russell, and Bloomberg


Fund Investors Will “Run”? Sorry, Charlie Brown

During the first three quarters of 2018, even though long-term interest rates were rising (meaning bond prices were falling), taxable bond mutual funds received $109 billion in net inflows (Figure 3.9). During the fourth quarter of the year, investors withdrew $112 billion, on net, from taxable bond mutual funds despite decreasing long-term interest rates (meaning bond prices were rising). This outflow may seem surprising, but investors may have been reacting to the abrupt flattening of the Treasury yield curve during the fourth quarter. The difference in yield between 10-year Treasury notes and 3-month Treasury bills was 1 percent in the early part of October, but the spread fell to 24 basis points by year-end 2018, its low point of the year.

Investor demand varied across specific categories of taxable bond mutual funds in 2018. With interest rates rising, investors directed money toward investment grade and government bond mutual funds (especially into shorter-term bond mutual funds), which received $22 billion in net inflows in 2018, while investors redeemed $34 billion from high-yield bond mutual funds in 2018. World bond mutual funds, which typically hold a mix of bonds denominated in US dollars and foreign currencies, saw net inflows of $7 billion.

Demand for municipal bond funds was mixed throughout the year, with inflows amounting to $4 billion through year-end 2018 (Figure 3.9).

Figure 3.9

Net New Cash Flow to Bond Mutual Funds in 2018

Billions of dollars; monthly, 2018


1 In February 2018, bond mutual funds had net inflows of less than $500 million.
2 In September 2018, municipal bond mutual funds had net outflows of less than $500 million.

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 held only 9 percent of the US bond market (US government bonds, corporate bonds, and tax-exempt bonds) in December 2018, up from 5 percent at year-end 2008. This means that 91 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.

Demand for Bond Mutual Funds

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 2009 through 2018 (Figure 3.10). A number of factors have helped sustain this long-term demand for bond mutual funds.

For example, 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 during the first three quarters of 2018, they were likely mitigated, in part, by the demographic factors that have supported bond fund flows over the past decade.

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


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

The continued popularity of target date mutual funds also likely helped to limit outflows from bond mutual funds in 2018. 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 mutual funds or ETFs. Over the past 10 years, target date mutual funds have received net inflows of $532 billion. In 2018, target date mutual funds had net inflows of $53 billion and ended the year with total net assets of $1.1 trillion (Figure 8.24). 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 (Figure 8.14).


Debunking Assumptions About Bond Mutual Funds’ Flows and Bond Sales

Hybrid Mutual Funds

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 its asset allocation more in line with prospectus objectives, which could be necessary following capital gains or losses in the stock or bond markets.

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 2018, hybrid mutual funds had negative net new cash flows of $91 billion (or 6 percent of prior year-end total net assets), following $28 billion of net outflows in 2017 and $42 billion of net outflows in 2016. Many factors likely have contributed to this change in the use of hybrid mutual 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 2018, assets in target date funds were $1.1 trillion, up substantially from year-end 2005 (Figure 8.24).*

* 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.

Net outflows from hybrid funds from 2015 through 2018 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, $110 billion from flexible portfolio funds in the past four years.

Figure 3.11

Net New Cash Flow to Hybrid Mutual Funds

Billions of dollars, annual


The Growth of Other Investment Products

Some of the outflows from long-term mutual funds in 2018 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 2018, 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, 36 percent owned at least one equity index mutual fund in 2018. As of year-end 2018, 497 index mutual funds managed total net assets of $3.3 trillion. For 2018 as a whole, investors added $156 billion in net new cash flow to these funds (Figure 3.12). Of the new money that flowed to index mutual funds, 40 percent was invested in funds tied to world stock indexes, 37 percent was invested in funds tied to domestic stock indexes, and the remainder (23 percent) went to funds tied to bond or hybrid indexes. Total net assets in index equity mutual funds made up 29 percent of all equity mutual fund assets in 2018 (Figure 3.13).

Figure 3.12

Net New Cash Flow to Index Mutual Funds

Billions of dollars, annual


Figure 3.13

Index Equity Mutual Funds Continued Their Steady Growth

Percentage of equity mutual funds’ total net assets, year-end


Index domestic equity mutual funds and index-based ETFs have particularly benefited from increased investor demand for index-based investment products. From 2009 through 2018, 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 $1.4 trillion (including reinvested dividends) (Figure 3.14). Index domestic equity ETFs have grown particularly quickly—attracting one and a half times the net inflows of index domestic equity mutual funds since 2009. Part of the recent increasing popularity of ETFs is likely attributable to more brokers and financial advisers using them in their clients’ portfolios. In 2017, full-service brokers and fee-based advisers had 17 percent and 28 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


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

Note: Mutual fund data include net new cash flow and reinvested dividends; ETF data for net share issuance include 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


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, 2018”

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 22 percent in 2017. This recent expansion is due, in part, to the growth in target date 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


Note: Assets exclude Direct Filing Entity assets that are reinvested in collective investment trusts. Data prior to 2017 come from the Form 5500 Research data sets released by the Department of Labor. Data for 2017 are preliminary, based on Department of Labor 2017 Form 5500 latest data sets.

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

Money Market Funds

In 2018, money market funds received $159 billion in net new cash flows (Figure 3.17), up from $107 billion in 2017. Prime money market funds received the bulk of the inflows ($103 billion), followed by government money market funds with $43 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 four times in 2018, 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 2018 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, 2018


1 In February 2018, prime money market funds had net inflows of less than $500 million.

2In August 2018, tax-exempt money market funds had net outflows of less than $500 million.

3 In September 2018, tax-exempt money market funds had net inflows of less than $500 million.

Figure 3.18

Net Yields of Money Market Funds Far Exceeded MMDA Rates by the End of 2018

Percent; month-end, 2015–2018


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 the Federal Deposit Insurance Corporation