There is an emerging and overlooked user group of ETFs: mutual funds.
ETFs have been seeing money move in the door while investors flee U.S. stock mutual funds. Also driving the inflows are mutual fund purchases of ETFs to implement their investment strategies.
“For the first nine months of 2012 investors have taken $70 billion from equity mutual funds but have added $85 billion to equity ETFs: in other words they have increased their exposure to equities,” Jeffrey Yale Rubin and Kevin Pleines at Birinyi Associates, Inc. said in a report. “And since March 2009 there has been a cumulative net outflow from equity mutual funds of – $221 billion but an inflow of $270 billion to equity ETFs.” [ETF Performance Beats Active Management]
A recent WSJ report cited statistics from the Investment Company Institute finding that “since the market low in March 2009, investors have yanked a net $138 billion from mutual funds and exchange-traded funds that invest in U.S. stocks.” [ETFs Taking 57% of Mutual Fund Flows This Year]
So, today, mutual fund providers are deciding to get in on the game, and have decided to use ETFs to access targeted areas of the market at a better price. Rather than have a number analysts research every nook of the market, providers are employing a small sample of technical analysts to research a small pool of ETFs, reports Paul Katzeff for Investor’s Business Daily. The strategy of a mutual fund remains the same, the mutual fund holds an ETF to make the process seamless, to simplify it.
Smaller mutual funds use this technique the most because it can cut costs and makes use of limited resources. As of October 16, more than 1,000 mutual funds held ETFs. The most common vehicles that ETFs show up in are the target-date and life-cycle funds. [Stock Mutual Fund Exodus Continues as ETFs See Inflows]
Some of the larger firms that are using this strategy include JP Morgan, Legg Mason, and John Hancock.
Tisha Guerrero contributed to this article.
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