Data and Analytics Insights

The evolution of the US fund industry – innovations and trends influencing the global fund markets

Robert Jenkins

Global Head of Research for Lipper, Also president and CEO of Financial Research Corporation (FRC)

Examining the origins, evolution, and defining innovations leading to the global growth of mutual fund investing

Origins of Western Mutual Fund Investing

The mutual fund has democratized investing by enabling access to professional management and the benefits of scaled asset allocation and diversity for investors across the income spectrum. Early origins likely hailed from collective investment trusts first promulgated by the Dutch in the mid-eighteenth century. Perhaps the inspiration for this novel investing approach sprang from another pioneering event from the Dutch: the first investing bubble—known as the famous tulip bulb “mania”—of the 1630s. This event saw everyday people investing their life savings in single tulip bulbs that rose to prices equalling 10 times their annual incomes before crashing back to earth. Needless to say, this spiralling event likely had much to do with highlighting the need for thoughtful investment oversight and the dangers of piling all one’s savings into a single asset in a speculative frenzy. Collective investment concepts popped up here and again over the intervening years until the U.S. launched the first mutual fund in 1924 with the MFS Massachusetts Investors Trust Fund. Since then, the industry has innovated and expanded its reach over the years to become a staple of retail and advisor driven investing. From these humble origins, the U.S. has grown to become the largest and most influential fund market in the world.

Growth of Global Funds Market – 2004 -Present (U.S. in Light Blue)

This chart shows the growth in AUM by region of the major global fund markets from 2004 thru to 2022. US in light blue is the largest followed by EMEA ex UK and Offshore.

After rolling out the first funds in Boston in the 1920s, the fund industry did hit a couple rough patches on its way to mass adoption as the crash of 1929, the Great Depression, and the long bear market of the 1960s and ‘70s served to rattle investors’ confidence in the markets. In between these events were the very significant regulatory foundations put in place by the SEC as part of its response to the systematic failures in the crash of ’29—namely the SEC Acts of 1933 & 1934, and Investment Company Act of 1940. The ’33 and ’34 acts set forth requirements around securities disclosures and the parameters of trading and advice in securities transactions. The Investment Company Act of 1940 targeted mutual funds and the individuals managing them. Collectively, these acts served to bring order and accountability to investing in the funds markets, thus making them more attractive and secure for individual investors.

The 1950s saw growth in the number of fund products and an uptick in public interest. The first “star” manager—George Tsai of Fidelity Investments—emerged as word spread of his record of outperformance. The 1960s saw continued growth halted only by the elongated bear market lasting into the 1970s. Innovation, however, didn’t stop as the early ‘70s saw the first index fund being launched (in 1971) and John Bogle’s new firm, Vanguard, launched the first retail index fund in 1976. His staunch desire to lower the cost of investing and make products more accessible also led to the mutual ownership structure of Vanguard and the eventual innovation of the no-load mutual fund. Not to be outdone, Ned Johnson—the founder of Fidelity—launched check writing off of money market accounts in 1974. This brought retail investors’ savings into mutual fund houses where the act of swinging those assets into a no-load fund became a very easy exercise. Collectively these innovations lowered the costs and increased the ease of access and overall attractiveness of investing for retail investors.

Along came the bull market of the 1980s and it seemed everyone was investing—and making money—on Wall Street. Movies and other popular culture celebrated the trend and a new wave of “star” fund managers emerged. Peter Lynch of Fidelity became well known through books he wrote describing his “folksy” style of finding winning investments while walking through a supermarket or standing in line at a donut shop. Simply being observant of products and companies in your everyday life that seemed to be gaining in popularity generally meant that buying their stocks would produce outsized gains. He was achieving those gains in his Magellan Fund and his approach lured in new money at a rapid clip.

Then came the 1990s and the rise of defined contribution plans. This trend emanated from the 1974 ERISA Act and the subsequent Revenue Act of 1978 that set forth guidelines for company retirement plan investing. By the ‘90s, the basic math of liabilities facing many large pension funds began to become clearer to retirement plan sponsors as a calculation that may never see the numbers add up to equal the benefits promised. Defined benefit pension plans increasingly began ceding their role to defined contribution plans known as 401(k)s, 403(b)s and 457s. The preferred underlying investment in these plans soon became mutual funds given that they had inherent diversification benefits and involved professional management while eliminating the need for plan sponsors to invest in individual securities themselves.

A few prominent mutual fund shops saw this evolution and entered into the retirement plan administration (or recordkeeping) business. As administrators, fund shops could determine the menu of available fund investment options for retirement plans. Not surprisingly, these menus typically offered the fund options managed by the same company. As the trend of DC plans exploded in the 1990s, these fund shops were growing their share of investable assets at a rapid clip. The tech bubble blow-up and implosion of firms such as Enron and WorldCom—which invested the bulk of its employee retirement plans in its companies’ stocks—fuelled the rush to DC plan investing using mutual fund platforms. The trend was further enabled in 2006 with the passage of the Pension Protection Act, which underscored the emergence and eventual dominance of the target-date fund. These plans are now helping fan the flames of the even hotter ETF market—as we will discuss.

Growth of U.S. Funds Market – 1970 – Present

This chart shows the growth of the US funds market broken down by asset class from 1970 thru YTD 2023 (April). Equities are the largest asset class by AUM followed by Bonds.

Flash forward into the 2000s and to the present day and the innovations have continued at a fast and furious pace. ETFs and passive investing spiralled into “smart beta” and continued into thematic and factor products all while increasingly blurring the lines between active and passive management. Major market meltdowns at the turn of the century and following the Great Financial Crisis caused investors and advisors to seek new tools to help diversify asset classes that seemed to be moving in lockstep and breaking away from historical norms. Liquid alternatives (alts) and thematic investing begin to fill these needed correlation benefits. Still another major trend emerged inspired by the world around us as people began earnestly investing their values under the umbrella product lines of ESG or responsible investment funds.

Meanwhile, throughout this fund investing evolution, the advisory space was seeing its own wave of change. Investors began dismissing the notion of stockbrokers buying individual stocks and bonds for them at a commission and began demanding fee-based investment solutions where both parties participated in the performance of the portfolio—for better or worse. Younger investors with more of a tilt toward technology sought solutions for their savings from the comfort of their PC and mobile phone, bringing rise to robo-advisors who used low-cost passive ETFs in very simple asset allocation accounts.

As we have advanced into the 2020s, investment solutions are being wrapped in individual separately managed accounts (SMAs) and direct indexing products where customization once reserved for institutions and the ultra-wealthy are now being made available to the masses. Investing has certainly come a long way and the results are more fairly priced investment solutions that incorporate risk-tailored strategies with tax efficient trading and client values woven into the mix. Other developed and developing fund markets around the globe are following along similar evolutionary paths and many of these advances are bringing about important changes in democratizing their respective retail investing industries.

Major fund industry innovations - Passive investing

There is an overarching aura of wisdom to passive investing that is inherently attractive and innately appropriate for many everyday investors. By investing in the most popular broad-based market index funds, investors can achieve returns on par with the markets that they read about and see on the nightly news. They get the benefits of diversification and the transparency to understand exactly what they’re investing in at any given time. Also, just by their nature, these products tend to have fewer transactions which ultimately results in lower costs to invested principal. And, if we’re talking about costs, all of the above means we’re not paying for active portfolio managers and research teams, so the fees are also much better. When purchased through an ETF wrapper, index products bring even more cost savings and added benefits of tax efficiency and ease of trading and liquidity. Perhaps the biggest benefit is the optics of the oftentimes market neutral performance of these funds. When investors see that their savings are essentially mirroring market performance, they tend to stay the course and avoid making rash market-timing decisions that usually end unfavourably.

With all the above taken into consideration, it’s easy to understand why the introduction and proliferation of passive investing is one of the most important investing innovations hailing from the U.S. fund market. It has changed the landscape for retail investors—particularly those who limit their investing to their employer’s retirement plans. The adoption of these products has been a key driver in the growth of global funds AUM since the stock market bubble.

U.S. Assets under Management ($Trillion) – Active, Passive

This chart shows the breakout of Active vs Passive AUM in the US from 1970 thry YTD 2023. Active in dark blue still leads passive in light orange but Passive has been gaining ground dramatically in the past 10 years. The chart has the same shape as the prior chart as they both capture US AUM, but break it down differently.

Rolling Estimated Net Flows ($Bil) to U.S. Funds – Active versus Passive

This chart shows the flows broken down by those going to active products and those going to Passive. Again, in the past 10 years, Passive flows have grown and tend to be more positive while Active flows are less dominant then they used to be and have several negative years – reflecting a migration of funds from Active to Passive.


Exchange-traded funds (ETFs) made their debut in 1993 with the SPDR fund or S&P 500 Index ETF. The unique and relatively complex structure was a bit confusing at first, but the tradability during market hours led investors to embrace them. ETFs took all the positives of passive and wrapped them in a superior package. Cost, tax efficiency, and liquidity likely stand out as the most important features of ETFs. Simply put, if you weren’t inclined to spend the time to find the next “star” fund manager and you wanted low costs and market-like returns, these were the products for you.

ETFs have accelerated the rise in the use of funds in wealth advisory practices as well. In the wake of the flood of conflicts of interest issues off the back of the tech bubble and financial crisis market meltdowns, fund of fund solutions under an AUM fee structure became the new normal for wealth advisors. Regular funds were fine at first, but their fees cut into the performance and the poor tax efficiency for clients was a tough sell. ETFs solved all that and the innovations that have since come to market in the form of focused, thematic and factor products have enabled advisors the ability to apply even more fine tuning and customization to their clients’ portfolios in a scalable way.

All these benefits and the adoption of ETFs by advisors now have fund managers clamouring to rewrap their active conventional fund products as ETFs to jump on the bandwagon. With this new wave of fund options being made available at lower price points, advisors now have even more component parts to work with in developing bespoke solutions for their clients and retail investors are the ultimate beneficiary.

ETFs have brought similar change to retirement plan investing. Plan fiduciaries take particular comfort in putting ETFs on plan platforms knowing they are among the cheapest products for any given asset class and the resulting performance will closely mirror the major market indices. While passive was one of the most important investing innovations, ETFs can rightly take the crown as the most important product innovations since the introduction of the mutual fund itself.

U.S. Assets under Management ($Bil) – Mutual Funds vs ETFs

Shows the breakdown of conventional mutual funds AUM vs ETF AUM from 1993 thru YTD 2023. Conventional funds still dominate, but ETF’s are gaining continuous ground.

Rolling Years U.S. ETFs Net Flows ($Bil)

This chart shows the growth in year-on-year net flows to US ETF products from 1993 (when ETF’s first started trading) thru YTD 2023. Flows fluctuate based on broader market environments but are generally on an uptrend- again, over the past 10 years in particular.

Target-date funds

Arguably one of the best designed products for everyday retail investors, the target-date fund stands out as an innovation that truly helps those who have no background or interest in investing and may not have the wealth to attract the services of an advisor. This group represents the vast majority of working individuals in the U.S. Studies of defined contribution plans from the ‘90s and early 2000s showed most 401(k) plan participants were either 100% invested in stocks or 100% invested in a safe option like a money market fund. They tended to check a box based on their core risk tolerance and never looked back. Neither approach is a good one for most age groups—it’s either too risky or too conservative.

Target-date funds (TDFs) pioneered the concept of developing an asset allocation glidepath that moved from a riskier allocation of asset classes to more conservative over time as investors age. You simply bought the fund that corresponded with your anticipated year of retirement and the fund would take it from there adjusting the risk of your portfolio slowly and almost linearly over time to a more conservative allocation before eventually ending in a mix of investments best suited to move into an income generating strategy in retirement.

These funds took off after the Enron and WorldCom employee retirement plan implosions where most employees were 100% invested in the company’s stock only to see these companies go out of business practically overnight. The Pension Protection Act of 2006 was put in place as a result of these retirement plan debacles and further supported the value-add that TDFs bring to everyday investors retirement accounts by granting these products the status of qualified default investment alternative (QDIA). This designation indemnifies plan fiduciaries from legal challenges if TDFs are used as the default investment option for DC plans. In recent years, these products have embraced passive indexation to further the benefits to investors with ultra-low fees. This has fuelled immense growth in this space.

Rolling Years U.S. Target Date Funds AUM by Classification ($Bil)

This chart shows the increase in AUM in US target date funds broken down by the target date year category. The larger categories of 2025, 2030 and 2035 are the largest target investor retirement dates and represent the AUM of those generations of investors that coincide with baby boomers and Gen X who have tended to have worked longer and saved more in their 401k’s for retirement.

The wave of liquid alts

Liquid alternatives (liquid alts) are the mutual fund industry’s attempt to bring private investing strategies normally targeting institutions and the ultra-wealthy to retail investors. They emerged in popularity shortly after the market meltdown following the financial crisis. Investors were seeking products that provided embedded hedging strategies to help them through the next “black swan” event. Initially the need for risk management solutions was solved through market neutral and absolute return products, then that opened the door to a flurry of alternative strategies that weren’t quite so “risk-off.” Other products such as long-short, levered, global macro, and unconstrained bond funds began to fill in the space with riskier offerings.

These products were well-intended and actually served a need for diversifying tools that became even more useful in the post-financial crisis recovery when the long-standing correlations between stocks and bonds started to wane as both asset classes tended to move in tandem and usually upward in the subsequent low-interest rate environment.

Ultimately, this elongated stretch of seemingly all asset classes steadily rising year on year in lockstep led to the fading of the liquid alts fad. Due to their complexity, these products were hard to explain to both advisors and investors and ultimately many of the products—such as absolute return—didn’t perform as advertised. Meanwhile, other products—such as market neutral—performed exactly as advertised, but that performance was designed to be a flat or “neutral” return for diversification purposes, so it didn’t measure up to the eye-popping returns in the rest of the market. As a result of these poor optics, multiple liquid alts products that were rushed into the market ended up being liquidated and we were left with the legacy of levered, short/reverse products along with a smattering of market neutral funds. They found their rightful niche, but their star isn’t as bright. Still, they added to the toolkit of fund-of-fund based portfolio construction in a very beneficial way.

Smart (?) beta

The fund industry is always looking for the next hot trend—and smart beta became the flavour of the times shortly after the financial crisis. The initial idea was to lower the disproportionate impact of the largest capitalized stocks in index portfolios by equal weighting all the stocks in the index. This played off the notion that passive, index investing can very often leave investors overweight in overvalued stocks while also being underweight undervalued stocks—a thought that, on its surface, doesn’t make sense. From this origin, “smart beta” was born as a smarter way to get index-like returns. Soon thereafter, smart beta began to morph in a variety of ways such as using valuation measures or dividends to drive stock weightings. Then fund managers got even more creative with weighting schemes based on quality, volatility, liquidity, and so on. Smart beta essentially became a quasi-active approach to weighting securities as rules-based strategies and other systematic securities selection concepts were employed.

Eventually, the industry began to mock the very term “smart beta” and its use in the vernacular faded. But the concepts stayed on. Many smart beta strategies became reimagined over time as factor and thematic investing. People still invest in the equal weight index concept and it’s also often used in analysing markets—in particular to strip out the immense impact that the largest “mega cap” stocks have on the overall market. The enduring legacy then is quite important as these targeted strategy and factor exposure funds serve as useful component parts for advisors, robos, and retail investors to construct custom portfolio solutions.

Rolling AUM ($Bil) Smart Beta ETF’s by Factor: 2008 – April 2023

This chart shows the AUM by product type of Smart Beta ETF’s whose popularity spiked circa 2015/2016 before the term “smart beta” began to be cycled out of the lexicon. The products by and large have had good staying power and continued to gain assets and are now known under different terminology such as “factor” and “thematic” products.

Thematic and factor strategies

Thematic and factor-focused investing isn’t really new, but the optics and the range of choices have proliferated over the past decade. As we covered already, the use of thematic and factor strategies really started to take hold with the rise of smart beta products. Factor focused funds—like those investing in quality, momentum, size, value, or volatility—have proven to be useful single theme strategies to employ in specific market cycles and, perhaps more importantly, as useful component parts for custom portfolio construction. Strategists can use these products to provide a decided tilt toward a risk preference or an alpha generating satellite holding against a core position.

Factor products thematic brethren provide a slightly different use case as these funds can focus on a given industry or sub-industry such as finance or pharma or they can look at lifestyles and even trending fads. There are well-being funds, online gambling funds, and cannabis funds to name a few—there are even funds focused on mega-trends and disruptors. While these products can also serve a use case similar to factor products, they tend to also be a good way to bet on a specific thing, topic, or concept that an investor has some conviction on. Due to the often times meagre degree of diversity, these types of funds aren’t for everyone, but they do serve a purpose—if anything else but to gauge investor sentiment around certain industries, trends, and innovations.


ESG is as old as it is seemingly new. The term ESG is relatively new in mainstream investing parlance, but the concept of investing according to one’s values is arguably as old as the idea of investing itself.

The first incarnation of ESG investing likely emanated from funds catering to religious beliefs such as Shariah-compliant and Christian values. These investment strategies sought to exclude companies involved in businesses not aligned with the values of the respective faiths. Sin stocks are an example of negative screening techniques employed in religious and ethical funds. A common by-product of exclusionary investing—cyclicality and lack of industry diversity—became apparent early on with these strategies that can find themselves missing out on growth industries such as gambling, as well as companies less impacted by economic slowdowns, such as tobacco and alcohol.

During the 1970s interest in protecting the environment began to take hold with the institution of Earth Day and heightened awareness of the negative impacts of human activity on climate. Several responsible investing firms in the U.S. opened their doors during this time with a general theme of extending an exclusionary investing style into sectors deemed harmful to the environment such as oil & gas and other carbon intensive industries. When these two early styles converged, the number of excluded companies piled up and the volatility of the funds’ performance increased along with it. Nonetheless, this status quo of selective and broader exclusionary investing approaches continued on through the 1980s and ‘90s until the new millennium came along and we all realized climate change was coming along with it.

Over the past 20 years and particularly since the Great Financial Crisis, the idea of ESG investing—along with its now ubiquitous namesake acronym—began to take root. The style captured some of the thinking of earlier forms of socially responsible investing and coupled it with the concept of investing in companies making positive changes to their businesses in otherwise environmentally challenging industries. Since the concept of simply not investing in carbon offensive companies didn’t seem to be working, the logical next step was to invest in those that were trying to transition—thus begat ESG.

Sustainable and Responsible Investing Evolving Through Time

This diagram shows the major SI/RI (aka ESG) investing strategies with an approximate timeline of when they’ve become more well know in the market. Religious and negative screening styles of investing are arguably the first types followed by SRI, ESG, positive screening (including best in class) and impact. The chart also attempts to show how these products move from negative investing styles (eliminating companies and industries) to more positive styles (investing in companies leading in transition) as well as pure impact (investing directly in ESG oriented projects like green bonds).

ESG has since exploded and led to interests in other related strategies even more focused on change such as only investing in exclusively positive companies and projects—such as green and blue bonds—to investing in only those that are promoting actual positive outcomes known as impact investing. The concept also expanded out across the three E, S, and G pillars with products incorporating social and governance concepts such as diversity, fair pay, and investments in companies proving themselves to be positive actors in their communities and industries.

Propelled by a near global shift toward seeking to slow and reverse the more dramatic impacts of climate change while enhancing corporate diversity and global citizenship, ESG has been a boon to investment products over the past seven to eight years.

Rolling Years U.S. Responsible Investing (ESG) Funds AUM ($Bil) & Product Launches

This chart shows US ESG fund AUM via the bars with equity funds being the dominant asset class of funds. A line depicts the number of US ESG/RI/SI funds launched by year in the market – with the trend peaking in 2021 and declining since.

Investors began flocking to the products on the market while fund companies—never ones to miss a good trend—rushed out new products to meet the demand. Questions of what constituted ESG investing inevitably arose and many outside providers developed ratings and analytics to help guide these queries. However, inconsistent and unstandardized data resulting in conflicting and confusing signals from these ratings providers caused for a heightening debate amongst investors of what is and is not an ESG investment. Regulators have been trying to step in to bring order, but confusion still reigns despite these good intentions.

As a result, ESG became ripe for criticism, and criticism it received. Over the past two years, detractors have seized on the confusion to form a movement of anti-ESG sentiment that has since woven its way into culture wars and partisan politics—particularly in the U.S. The term “ESG” itself has taken on less-than-positive connotations and may soon find its way into the fund naming dustbin to join other also rans such as “internet funds” and “smart beta.”

Despite its current state, ESG or responsible investing has brought about real and lasting changes to the fund and investment analytics spaces. Most fund shops now have teams of ESG experts on staff, and the concept of incorporating ESG metrics into investment decisions has become commonplace across all manner of investment vehicles whether they label themselves as such or not. A new set of fundamental tools have been added to the investment, wealth management, and fund selection professions that, ultimately, will provide more transparency on how companies are operating their businesses. All of which can only be a good thing for investors.

Drivers of future industry growth

All of these investment industry innovations have provided an ever-increasing suite of tools to build portfolios and serve investors’ wealth building needs. Due to some very public revelations about the dangers of conflicts of interest from the late 1990s into the early 2000s, advisors began moving away from a model of building portfolios from the bottom up and being compensated by individual securities transactions into a portfolio construction approach using funds that structured advisory fees under an asset-weighted performance factor. In this way, advisors were incentivized to focus on strong performance for their investor clients—not just the commissions they earned buying and selling stocks and bonds.

These fund of fund vehicles began popping up in the 1980s and ‘90s but really took off after the internet bubble and financial crisis “black swan” market-shock events of the 2000s. Today they come in a variety of forms but centre around similar underlying structures: portfolios constructed of fund-of-fund like vehicles that are combined to match up against investor risk profiles, wealth and values goals, and time horizons. These investment platforms come under a variety of names and acronyms including TAMPS (turnkey asset management products), SMAs (separately managed accounts), wrap accounts, robo-advisors, and direct indexing to name a few.

Collectively, these managed accounts have further progressed the democratization of retail investing that the fund industry began. They enable advisors to deliver asset allocation solutions aligned with investor profiles that were once only available to institutions and wealthy investors—and most do so at a relatively bargain price. Taking the more recent innovations of ESG-focused funds and factor and thematic funds combined with traditional funds, these accounts can deliver products that enable investors to express their values, achieve tax efficient returns, and focus their money on their needs—such as income in retirement—like never before. Most of them also have easy-to-use tools and app-based platforms to provide transparency and ease of access to their funds and balances.

Legacy of fund and investing innovations yield positive benefits for investors

Not all innovations in the funds industry have been winners or even brought about positive benefits for investors, but they all had a place in the evolutionary cycle of new product and investment solution developments. Over the years, other major developed investing markets across the globe have been evolving through similar maturation processes with Western innovations often moving Eastward and influencing newly developing markets. This has enabled the global fund industry to grow together and allow for cross border investing and even more beneficial diversification options for investors and advisors.

Collectively, the innovations and ongoing evolution of the funds and wealth management industries are continuing to provide more accessible and tailored financial outcomes for everyday investors.

Stay updated

Subscribe to an email recap from:

Legal Disclaimer

Republication or redistribution of LSE Group content is prohibited without our prior written consent. 

The content of this publication is for informational purposes only and has no legal effect, does not form part of any contract, does not, and does not seek to constitute advice of any nature and no reliance should be placed upon statements contained herein. Whilst reasonable efforts have been taken to ensure that the contents of this publication are accurate and reliable, LSE Group does not guarantee that this document is free from errors or omissions; therefore, you may not rely upon the content of this document under any circumstances and you should seek your own independent legal, investment, tax and other advice. Neither We nor our affiliates shall be liable for any errors, inaccuracies or delays in the publication or any other content, or for any actions taken by you in reliance thereon.

Copyright © 2023 London Stock Exchange Group. All rights reserved.