With many fund managers choosing not to invest in their own funds, investors may see this as another reason to lean toward exchange traded funds (ETFs) over mutual funds.

As market conditions remain unstable, knowing that one’s money is invested like the pros may ease investor’s outlook on the current economic turmoil. However, too many fund managers lack the faith in what they are doing to actually invest their own money in their funds.

As Chuck Jaffe for MarketWatch explains, the captain allegedly no longer goes down with the ship. He points out that in nearly 46% of domestic stock funds included in a Morningstar survey, the managers had not invested any money at all in their respective fund!

Other asset classes show similar numbers. In nearly 68% of foreign stock funds, 66% of taxable bond funds, 70% of balanced funds, and roughly 78% of municipal bond funds all consisted of shareholder cash only.

If fund managers are withholding their own money from investment in their funds, investor’s spirits can understandably become a bit rattled. However, there are some situations in which it simply does not make sense for a manager to invest in his own fund. Jaffe uses young managers as examples, running bond funds or target-maturity date funds for investors in their 60s and 70s. It simply would not make sense for them to share the same investment outlook as their older clients.

With a limited number of scenarios in which a manager could justifiably not invest in his or her own fund, the number of managers who do just this is entirely out of proportion. As these managers choose not to invest in the funds they run, investors are sure to become a bit uneasy. However, it is things like this that will continually draw investors toward ETFs and away from mutual funds.

Tags | Mutual Funds, UNG