Low-cost ETFs will continue to grow this year as investors shift away from underperforming, overpriced mutual funds and favor indexed strategies, says noted financial blogger Barry Ritholtz.
“As investors figure out that they are not good at stock-picking or managing trades, they have also learned that most professionals are not much better,” he wrote in a Washington Post op-ed over the weekend. “Paying high mutual fund expenses to a manager who underperforms a benchmark makes little sense. This realization has led to the rise of inexpensive exchange-traded funds and indices.”
ETFs saw record inflows in 2012 as the U.S. business ended the year with nearly $1.4 trillion in assets under management. [Why ETF Providers are Stepping up Their Game]
“This ‘ETFication’ has obvious advantages: low costs, transparency, one-click decision-making. ETFs are accessible through the stock market for easier execution, with no minimum investment required,” writes Ritholtz, the CEO of quantitative research firm FusionIQ who also runs The Big Picture blog.
“Even bond giant Pimco recognized this trend and created an ETF version of Bill Gross’s flagship vehicle, the Total Return Fund,” he added. “Pimco actually charged more for the ETF than its mutual fund to prevent an exodus of investors from the world’s largest bond fund. This will eventually shift.”
PIMCO Total Return ETF (NYSEArca: BOND) has already gathered almost $4 billion in assets after listing in March 2012. [Active ETFs May Boom After SEC Lifts Derivatives Ban]
Full disclosure: Tom Lydon’s clients own BOND.