Investors Tired of Lagging Active Funds Pile Into ETFs

October 8th at 10:46am by John Spence

Investors last month shoveled the most cash into exchange traded funds in more than three years as they favor index-based ETFs for stock market exposure rather than underperforming actively managed mutual funds.

ETFs drew in $38 billion in new money during September, marking the strongest month of flows in over three years and a sharp rebound from August, according to Morningstar.

“So, yes, investors wanted quick, easy, immediate ‘beta,’ and they found it in ETFs,” reports Brendan Conway at Barron’s. “Get me the stock market, and get it for me, now!”

ETF flows in September showed investors were favoring risk-on sectors after the Federal Reserve launched its third round of quantitative easing, or QE3.

“U.S.-stock offerings topped all ETF asset classes with inflows of $18 billion,” Morningstar said. “Within each asset class, the riskiest segments attracted strong inflows. Among fixed-income funds, high-yield bond ETFs saw inflows of $1.6 billion; among U.S. stocks, small-caps gathered $2.8 billion; among international stocks, emerging markets collected $2.9 billion; and among sector stocks, real estate and financials took in more than $1 billion each.”

Assets under management in ETFs has climbed more than 14 times over the past decade to $1.5 trillion, CNBC reports.

Over the past 10 years, investors have removed a third of total assets under management, or $543 billion, from actively run equity funds globally and added $660 billion into passive ones that don’t require managers to pick stocks, but instead track a benchmark index, according to the article, which cited HSBC research.

“Retail investors and regulators have been made very nervous by the big swings in stock prices,” said Garry Evans, HSBC’s global head of equity strategy, in the report. “The high volatility also explains the big flows into passive funds in recent years: volatility makes it hard for active or thematic fund managers to perform well.”

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Tickers