Actively Managed Mutual Funds Are Investing in ETFs --- in a Big Way

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Will ETFs become more popular than mutual funds? It's a fair question since the net outflow of domestic-focused mutual funds this year has already likely set a record, with YTD (actually, through September) reaching $86 billion, the worst year yet for the class of funds. In fact except for a small net gain in 2009 ($3bn), investors have been abandoning domestic stock funds since 2007. (The retail cohort obviously has been heading into fixed income funds, as well global funds and "alternative" vehicles.)

But, net flows of indexed, domestic-focused ETFs has remained positive, according to the ICI, and are expexted to net $17bn in new assets. But, while households represent nearly 90% of all mutual fund assets, says ICI, only 6% of households also owned ETFs. That means, ETFs are growing in popularity among institutional investors and only savvy retail investors.

Our long-time Mutual Fund Contributing Editor Stan Luxenberg sent me this note backing up that analysis: 

"Hundreds of active mutual funds are now investing in ETFs. According to Morningstar, more than 130 funds hold SPDR S&P 500. More than 80 funds hold iShares MSCI EAFE. Not so long ago, active funds stayed away from ETFs. But portfolio managers have discovered that ETFs can play useful roles. ETFs have become popular with asset allocation funds, which attempt to outdo the benchmarks by shifting sector allocations. Some funds use ETFs as short-term holdings, but more funds are beginning to hold sizable ETF positions for the long term. Some funds invest in ETFs exclusively." 

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REP. Editor-in-Chief David Aldo Geracioti on the business of Wall Street from a free-market perspective.

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David Aldo Geracioti

Is the editor-in-chief of REP. magazine.  He is also a devotee of the Austrian School of Economics leading lights Ludwig von Mises, Friedrich von Hayek, Murry Rothbard and to other thinkers in...
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