Traditional Fund Managers' Newfound Focus on ETFs May Be Too Little, Too Late

Related: ETFs Gain Ground as Advisors Look to Passive Beta-Index Strategies

Even if mutual funds step in and aggressively expand with ETF offerings, the increased M&A activity does not address the underlying issue that many actively managed fund products still have unattractive track records.

“A handful of managers, such as AllianceBernstein, have acknowledged that overcapacity is an issue the industry will have to address,” Moody’s said. “Over time, active management will likely have to shrink substantially.”

Related: Active Managers Losing Ground to Passive Index Funds, ETFs

Looking ahead, the emergence of smart-beta ETFs, which combine actively managed styles in a cheap and passive index-based wrapper, could also eat away at active manager’s market share. However, Moody’s warned that investors may favor a handful of outperforming strategies, which could give rise to a high concentration of assets among a few smart-beta options, reflecting what could occur in the actively managed mutual fund space.

“Given the scalable nature of quantitative investing, the large number of smart beta managers is also likely to shrink to a few surviving winners managing large amounts of capital,” Moody’s added.

Click here to read the full story on ETF Trends.