The $33 Trillion Escape: How ETFs Are Quietly Eating Mutual Funds

The quiet reshaping of a $48 trillion industry#

On 10 August 2026, Goldman Sachs Asset Management converted two of its fixed income mutual funds into active exchange-traded funds, the Goldman Sachs Core Plus Bond ETF and the Goldman Sachs Income ETF. That single move lifted the firm's Exchange-Traded Funds (ETF) line-up past 247 strategies and more than $100bn in assets. It is not a one-off. It is one more step in a migration that is slowly pulling active management out of the mutual fund and into the ETF, and it is starting to bend the shape of a US fund industry that holds roughly $33.2tn in mutual funds and $15.7tn in ETFs.

What happened#

There are two developments. The first is a record run of fund-to-ETF conversions. A conversion takes an existing mutual fund and reissues it as an ETF, so investors keep their holding but wake up owning an exchange-listed fund instead. The count of US mutual-fund-to-ETF conversions has now passed 200, and the roster has moved well beyond boutiques. J.P. Morgan Asset Management has proposed converting several mutual funds into ETFs, and Goldman's August action sits inside a broader wave that also includes Raymond James and First Trust.

The second is regulatory. In November 2025 the Securities and Exchange Commission granted Dimensional Fund Advisors permission to add ETF share classes to its mutual funds, the first such approval since Vanguard's long-standing exclusive expired. By March 2026 the SEC had received roughly 100 applications and issued orders covering more than 48 funds. Where a conversion swaps one wrapper for another, a share class lets a single fund offer both at once. Same manager, same portfolio, two front doors.

Background: the wrapper is not the portfolio#

To see why this is a big deal, separate two things investors usually blur together: the strategy and the wrapper.

The strategy is the portfolio. The wrapper is the legal and operational container that holds it. A mutual fund and an ETF can own identical securities and still behave very differently, because they are built differently.

A traditional open-ended mutual fund transacts once a day at its net asset value, the closing value of everything it owns divided by shares outstanding. When you buy, the fund creates new shares; when you sell, it redeems them for cash. If enough investors sell at once, the manager has to sell underlying holdings to raise that cash. Selling appreciated securities creates realised capital gains, and under US tax rules the fund must pass those gains on to everyone still invested, whether or not they sold. That is how a long-term holder can end up with a taxable bill triggered by other people's redemptions.

An ETF trades on an exchange all day like a stock, and it uses a different settlement mechanism. Large trading firms called authorised participants assemble or break apart baskets of the ETF's underlying securities directly with the fund, a process known as creation and redemption. Crucially, redemptions happen in kind: the fund hands over securities rather than selling them for cash. Because it never sells, it rarely realises taxable gains inside the fund. The result shows up in the data. In 2025, only 7% of ETFs distributed a capital gain, against 52% of mutual funds.

Market implications: where the ripples land#

For fund houses, this is an existential product question. Active mutual funds have bled assets for years while active ETFs have taken money almost every month. Net assets in US active ETFs have climbed from about $140bn to over $1.6tn by early 2026, and close to 1,000 active ETFs launched in 2025 against just 95 new traditional mutual funds. A firm that cannot deliver its best strategies in an ETF risks watching them shrink inside a wrapper investors no longer want. BlackRock, whose ETFs helped push its assets to a record $15.3tn in the second quarter of 2026, has made the wrapper central to its growth.

For advisers and platforms, the change touches fees and operations. ETFs settle through brokerage accounts and do not pay the distribution fees baked into some mutual fund share classes, which nudges advice models further towards fee-for-service. Custodians and fund administrators gain a new servicing line: State Street, for instance, won a mandate to run ETF share-class servicing for Thornburg, covering basket creation, order management and settlement.

For markets more broadly, more assets in exchange-listed wrappers means more of the tape runs through authorised participants and intraday liquidity, rather than once-a-day NAV strikes. For bond strategies like Goldman's newly converted funds, that raises live questions about how an intraday-traded vehicle handles assets that themselves trade less frequently.

Inside the tax machine#

The engine is Section 852(b)(6) of the US tax code, which says a fund does not recognise a gain when it distributes appreciated property to a redeeming shareholder in kind. An ETF exploits this daily. When an authorised participant redeems, the ETF pushes out its most appreciated lots, the shares with the largest embedded gains, and hands them over rather than selling them. Some managers reinforce the effect with what traders call a heartbeat trade: a short-lived inflow of cash or securities that is then redeemed in kind, flushing out low-basis lots without generating a taxable event. The academic estimate of the payoff is meaningful. A study in the Review of Financial Studies found that the ETF structure lifted long-term investors' after-tax returns by about 1.05% a year relative to comparable mutual funds.

The regulatory scaffolding sits on Rule 6c-11, the SEC's 2019 "ETF rule" that let most ETFs launch without individual exemptive orders and standardised how baskets work. The newer share-class relief goes a step further: it allows one fund to run both a mutual fund class and an ETF class over the same portfolio, so the in-kind machinery of the ETF class can scrub embedded gains for every class in the fund. Vanguard ran exactly this design for two decades under a patent that expired in 2023, and its mutual fund investors quietly enjoyed the tax benefit of the attached ETF. What was one firm's private advantage is becoming an industry template.

None of this changes the portfolio's pre-tax return. The strategy, the holdings and the manager are the same. What changes is how much of the gain the taxman takes along the way, which for a taxable investor compounding over decades is not a rounding error.

Critical analysis: the case for caution#

Tax efficiency is a benefit for taxable accounts and largely irrelevant inside tax-sheltered retirement accounts, where a great deal of American fund money already sits. For an investor holding funds in a 401(k), the wrapper switch mostly changes trading mechanics, not their tax bill.

The share-class model also carries genuine conflicts that the SEC flagged. Mutual fund and ETF classes share one portfolio, so trading costs, cash drag and the tax consequences of in-kind redemptions have to be allocated fairly between two sets of investors who trade in different ways. Get the allocation wrong and one class subsidises the other. Regulators attached conditions on liquidity, disclosure and board oversight precisely because these frictions are real.

Intraday liquidity is another catch. An ETF is only as tradable as the basket behind it. In calm markets the authorised participant mechanism keeps an ETF's price close to its underlying value, but in stressed conditions, especially for less liquid corporate or municipal bonds, prices can gap away from NAV and spreads can widen. Converting a bond mutual fund into an ETF does not remove that risk; it moves it onto the exchange, where it is more visible and sometimes more jarring.

There is also a transparency trade. Most active ETFs disclose holdings daily, which some stock-pickers resist because it can let others anticipate their trades. Semi-transparent structures exist, but they add complexity and have not been universally embraced. The convenience of the ETF wrapper is not free for every strategy.

Historical context: from 1993 to the great unbundling#

ETFs are not new. The first US ETF launched in 1993, and for most of their life they were index vehicles, cheap trackers of the S&P 500 and its cousins. Active management stayed in mutual funds, partly because daily disclosure and the ETF's trading model did not suit discretionary stock-pickers, and partly because the operational path to launch an active ETF was slow.

Three things loosened that. Rule 6c-11 in 2019 industrialised ETF launches. The expiry of Vanguard's share-class patent in 2023 opened a structure that had been off-limits to rivals. And the SEC's 2025 decision to grant that structure to others turned a workaround into a mainstream option.

So is this a paradigm shift or just another cycle? It looks structural rather than cyclical. The pull is not a market mood that will reverse; it is a durable tax and cost advantage baked into the wrapper, reinforced by regulation that now blesses it. The likelier description is an unbundling. For decades the mutual fund bundled a strategy, a distribution channel and a tax treatment into one product. The industry is now separating the strategy from the wrapper and letting investors pick the container that suits them. Mutual funds will not vanish; retirement plans, certain institutional mandates and some illiquid strategies still favour them. But the default wrapper for new active money is changing, and defaults are powerful.

Key takeaways#

1. Active management is migrating from the mutual fund wrapper into the ETF, driven by more than 200 fund-to-ETF conversions and the SEC's 2025 approval of ETF share classes.

2. The core attraction is tax structure. In-kind redemption let only 7% of ETFs distribute capital gains in 2025, against 52% of mutual funds, worth roughly 1% a year in after-tax return for long-term taxable investors.

3. Goldman Sachs's 10 August conversion of two bond funds, lifting its ETF suite past $100bn, is a recent marker of a trend that now includes J.P. Morgan and other large houses.

4. The benefit is real for taxable accounts but muted inside tax-sheltered retirement plans, and share classes create allocation and conflict issues that regulators have hedged with conditions.

5. This looks like a structural unbundling of strategy from wrapper rather than a passing cycle, though mutual funds will keep a role.

Frequently asked questions#

Is my mutual fund about to disappear? Not imminently. Conversions and share classes are spreading, but most mutual funds are continuing as normal. If a fund you own converts, you generally keep your investment in ETF form without a taxable event, though you may need a brokerage account to trade it.

Does converting to an ETF change what the fund invests in? No. A conversion or an added share class keeps the same portfolio and manager. What changes is the wrapper: how the fund trades and how it handles tax, not the underlying strategy.

Why are ETFs more tax-efficient than mutual funds? Because ETFs redeem in kind, handing securities to large trading firms instead of selling them for cash. That avoids realising taxable gains inside the fund, so long-term holders are less likely to receive a surprise capital gains distribution triggered by other investors' redemptions.

Does the tax benefit help me in a 401(k) or IRA? Largely no. Tax-sheltered accounts defer or exempt tax on gains anyway, so the ETF's tax edge matters most in ordinary taxable accounts. In a retirement account the change is mainly about trading mechanics and fees.

What is an ETF share class? It is a way for one fund to offer both a mutual fund version and an ETF version over the same portfolio. Vanguard did this for years under a patent; since that patent expired and the SEC approved others, more firms can now use the design.

Are there risks to holding a bond strategy as an ETF? Yes. An ETF's tradability depends on the liquidity of its holdings. In stressed markets, prices for less liquid bonds can move away from the fund's underlying value and trading spreads can widen, which is more visible in an exchange-traded wrapper.

Is this just hype, or a lasting change? The drivers are structural rather than fashionable: a durable tax and cost advantage supported by settled regulation. Adoption should keep growing, though mutual funds will remain common in retirement plans and for some strategies.

References#

1. Goldman Sachs Asset Management, Conversion of two fixed income mutual funds to active ETFs (company announcement, 10 August 2026).
2. Investment Company Institute, Exchange-Traded Fund Data, June 2026 and Trends in Mutual Fund Investing, June 2026 (industry statistics).
3. Investment Company Institute, SEC Clears Path for ETF Share Class Trading (news release, 2026).
4. Dimensional Fund Advisors, Dimensional Receives SEC Approval for ETF Share Classes (company announcement, November 2025).
5. U.S. Securities and Exchange Commission, Division of Economic and Risk Analysis, The Fast-Growing Market of Active ETFs (Working Paper, not peer-reviewed, February 2026).
6. Review of Financial Studies, Role of Taxes in the Rise of ETFs (peer-reviewed research).
7. Morningstar, Few ETFs Project Capital Gains Distributions in 2025.
8. Morningstar, Active ETFs: 9 Charts on a Record Year.
9. State Street, Tax efficiency is structural: ETFs continue to issue fewer capital gains than mutual funds.
10. State Street, State Street Expands Long Partnership With Thornburg to Support New ETF Share Classes (company announcement, 2026).
11. Deloitte, Guide to ETF Share Class Approval.
12. CNBC, Vanguard's expired patent may emerge as game changer for fund industry.
13. ETF Database, The Great Wrapper Migration: Mutual Fund-to-ETF Conversions Cross 200.
14. Pensions & Investments, Mutual fund-to-ETF conversions gain momentum as major asset managers join the wave.
15. J.P. Morgan Asset Management, J.P. Morgan Asset Management Proposes Conversion of Mutual Funds to ETFs (company announcement).
16. Private Banker International, BlackRock assets under management hits $15.3tn in Q2 2026.

This article is for information only. It is not investment advice, a recommendation, or an offer to buy or sell any security. Figures described as estimates or projections are not guarantees. Consult a qualified professional before making financial decisions.