Small Active Funds Are Losing Twice: Poor Beat Rates and Shrinking Assets
Small Active Funds Are Losing Twice: Poor Beat Rates and Shrinking Assets
Rich DupreySun, October 4, 2026 at 4:04 PM UTC
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Northern Trust Asset Management will convert six mutual funds totaling $33 billion into ETFs in Q1 2027, more than doubling its existing ETF business.
Active bond mutual funds shed $6.48 billion in one week while bond ETFs absorbed $12 billion, widening the structural gap between the two vehicles.
Bloomberg Intelligence found smaller active funds beat benchmarks least often, yet still charge full fees while outflows push them further into that losing size category.
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A Bloomberg Intelligence study found that active funds' beat rates correlate with fund size, with the smallest funds performing worst. ETF analyst Eric Balchunas flagged the finding on X on September 28, 2026.
"Bigger is better," Balchunas wrote, noting that beating a benchmark is "very difficult in general." The full study sits on the Bloomberg terminal under BI FUND or BI ETF; specific beat rates and size categories aren't public.
Small active funds still charge active-management fees yet fall in the group least likely to earn them back. Simultaneously, investors are pulling money out of them.
Bond Fund Investors Pulled Billions After Weeks of Inflows
The Investment Company Institute reported that active bond mutual funds had $6.48 billion in outflows in the week ended September 16, 2026, their first weekly outflow after several weeks of positive flows. The prior week, the same funds took in $664 million, according to Investment Company Institute.
According to Investment Company Institute, taxable bond funds accounted for $4.2 billion of the withdrawals and municipal bond funds for $2.28 billion. In the same week, bond ETF net issuance reached $9.72 billion, the institute said.
Other trackers measured a slightly different period. ETF.com put U.S. fixed-income ETF inflows at $10.3 billion for the week ended September 18. Benzinga reported that Balchunas was also referring the week ended September 18, 2026. For that week, Eric Balchunas said bond ETFs took in $12 billion, which he said "more than offsets for now."
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How Bond Fund Withdrawals Can Turn Into a "Doom Loop"
A mutual fund must pay departing investors in cash. Heavy redemptions force managers to sell bonds, pushing down prices and the fund's net asset value (NAV). A falling NAV can trigger more redemptions.
Balchunas called that cycle a "doom loop," warning that "these MFs will be forced sellers of bonds if outflows pick up."
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ETFs trade on an exchange, so when one investor sells, another typically buys, and the fund isn't forced to sell holdings. This structure removes the forced selling that redemptions cause in mutual funds. Bond ETFs can still fall sharply during market stress.
Northern Trust Plans to Move $33 Billion Into ETFs
While small funds shrink, big firms are restructuring. Northern Trust Asset Management, the investment arm of Northern Trust (NASDAQ:NTRS), plans to convert six mutual funds into ETFs. In a mutual fund to ETF conversion, the fund's existing assets and shareholders move into an exchange-traded fund.
Northern Trust Asset Management said the six funds held about $33 billion as of June 30, 2026. It expects the conversions to happen in the first quarter of 2027. The management firm managed about $27 billion in ETF assets as of that same date, so the plan would more than double its ETF business once it's completed. Bloomberg and Yahoo Finance both described it in their headlines as the largest-ever conversion of its kind.
One note: the two biggest funds in the plan are index funds. According to Northern Trust Asset Management, the $19.3 billion Northern Stock Index Fund will become the Northern Trust MSCI US 500 ETF. The $6.7 billion Northern International Equity Index Fund will become the Northern Trust MSCI EAFE ETF, according to Northern Trust Asset Management.
The deal shows money shifting from mutual funds to ETFs. It demonstrates how much scale counts. Northern Trust Asset Management reported $1.6 trillion in assets under management as of June 30, 2026. Its parent company posted 5 consecutive quarters of positive ETF flows through Q2. Northern Trust shares are up 27.4% year to date through October 2, 2026.
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The biggest challenge hits small, shrinking funds. Outflows push them further into the size group that beats its benchmark least often.
Watch ICI's weekly flow reports for continued bond fund outflows. Northern Trust's conversions are scheduled for early 2027.
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Source: “AOL Money”
