ETFs vs. Mutual Funds

Not getting enough bang for their buck, disillusioned investors have reduced their positions in underperforming actively managed mutual fund investments. Instead, more are turning to low-cost, index-based exchange traded funds as a way to keep exposure to the broader markets.

Investors have redeemed $119.3 billion from U.S. stock funds in 2012 through November, the largest yearly outflow since 2008, reports Kirsten Grind for The Wall Street Journal.

Meanwhile, U.S. stock ETFs attracted $30.4 billion over the same period. Moreover, along with new bond ETF inflows, total inflows to ETFs were $154 billion, which incidentally was the larges inflow since 2008. [Traders Using ETFs in Place of Individual Stocks]

Mutual fund observers noted that the trend picked up in December, with ETF inflows rising to $28.1 billion, compared to $20.6 billion in November, according to the WSJ article.

After a string of large stock oscillations, investor confidence has taken a hit. Additionally, it has been hard on stock pickers as equity fund managers largely underperformed benchmark stock indices. Consequently, more are willing to just passively track indices through low-cost ETFs – the average ETF expense ratio is about 0.55%.

Wall Street got most 2012 market calls wrong, Bloomberg reports. The Bloomberg Global Aggregate Hedge Fund Index, which tracks the average performance of the $2.2 trillion industry, rose 1.6% in 2012 through November. Over 65% of mutual funds benchmarked to the S&P 500 underperformed the benchmark.