Why Mutual Fund Assets Are Slithering Away to ETFs | ETF Trends

Net redemptions in the mutual fund world are slithering out of control and exchange traded funds (ETFs) could one of the reasons.

Over the past few years, one of the strongest mutual fund companies, American Funds (AIVSX), has seen a loss of $14.4 billion in net redemptions.  Additionally, Fidelity’s Contrafund (FCNTX) has shed about $4.5 billion in net redemptions since June of 2006.  What’s causing this outflow, and where are these assets going?

One reason for the huge jump in redemptions is that baby boomers are taking out more assets than the younger generation is contributing.  In the 1980s and 1990s, baby boomers were putting in more money into the market than anyone was taking out, states Max Rottersman of ETF Guide.  For example, when many baby boomers started contributing to their 401(k) plans, they started with $10,000 and now they are cashing in on these plans which are worth north of $100,000.  This means to break even, a fund would need at least 10 new investors for every retiring shareholder.

To add fuel to the fire, many investors are shunning away from mutual funds and are looking at ETFs.  Over the first nine months of 2008, net inflows of $104 billion have been seen in the ETF market.  Many investors are getting smarter and are looking for options with lower expense ratios, higher tax efficiency, more diversification and transparency- all characteristics of ETFs.

Some ETFs that have benefited from this outflow of assets from the mutual fund world are:

  • iShares Barclays TIPS Bond (TIP), which has about $10 billion in assets
  • iShares Barclays 1-3 Yr Treasury Bond (SHY), which has about $7 billion in assets
  • United States Oil (USO), which has about $4 billion in assets

When choosing an ETF, remember to always look under the hood, watch the trend lines, look long term and keep your risk appetite in mind.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.