In ETFs, the so-called smart money of institutional investors and hedge funds is mixed with individual investors.
Also, unlike U.S.-based mutual funds, many large ETFs are gathering assets from overseas.
“For many large U.S.-listed ETFs, a consistent stream of new money is flowing in from abroad,” Justice writes. “Many investors in places like Chile and Singapore are buying the same share class as you and I.”
Finally, the analyst points out that “more-tactical” investors and financial advisors are buying sector ETFs rather than individual companies to reduce single-stock risk.
“Perhaps that’s why ETF net fund inflows were twice as big as mutual fund flows. New money sources trumped the size differential of the two product universes. ETF assets remain just 12% of mutual funds, yet fund flows indicate that this scenario could be radically different in five to ten years,” Justice said.
Full disclosure: Tom Lydon’s clients own SPY.