Managers of active mutual funds are increasingly turning to perhaps their biggest rival, passive exchange traded funds, to bolster performance by eliminating cash drag.
“Fund managers say that they are turning to low cost ETFs as a way to mitigate the effects of so-called cash drag – the underperformance that comes from the 3 percent to 5 percent of assets that a manager typically holds in cash to meet investor redemptions. One study in the Journal of Financial Management published in 2006, for instance, found that cash holdings cut the performance of the average equity fund by 0.70 percent a year,” report David Randall and Jessica Toonkel for Reuters.
Increased use of ETFs by mutual fund managers comes at a time of rapid growth for the ETF industry and like their hedge fund counterparts, mutual fund managers are helping fuel the ETF boom.
According to ETFGI, a London-based ETF research firm, the global exchange traded products industry will surpass hedge funds in terms of assets under management this quarter.
“According to our analysis published on April 24th, assets in the global ETF/ETP industry reached a new record of US$2.926 trillion at the end of Q1 2015, while assets in the global hedge fund industry, according to a new report published by Hedge Fund Research (HFR), reached a record US$2.939 trillion. Assets in the ETF/ETP industry have been gaining on those invested in the hedge fund industry with the difference narrowing from US$230 billion at the end of 2013 to just US$13 billion at the end of Q1 2015,” according to a note published by ETFGI last month. [ETFs Almost Bigger Than Hedge Funds]
Assets in U.S.-listed exchange traded products rose to a record $2.132 trillion at the end of April, according to ETFGI.