Retail investors are putting more money into exchange traded funds than mutual funds, with big securities firms pointing to rapid growth among smart-beta offerings.
According to Broadridge Financial Solutions, assets in ETFs at retail financial-services companies, which help individual investors and financial advisors, increased by $265 billion, or 14%, year-over-year through June, reports Daisy Maxey for the Wall Street Journal.
Meanwhile, individual-investor holdings of long-term mutual funds at the financial-services companies expanded by $200 billion, or 6%, over the same period.
Looking at the largest wirehouses, ETF assets jumped by $70 billion, or 21%, in the year through June, whereas assets in long-term mutual funds was up by $6 billion, or just 0.5%.
Additionally, assets in ETFs held by registered investment advisors rose $78 billion, or 19%, whereas assets in long-term mutual funds held under RIAs rose $130 billion, or 9%, in the period. Frank Polefrone, senior vice president of Broadridge, argues that the growing popularity of ETFs among financial advisors is being driven by a shift away from commission-based business models. Instead, many advisors are now charging fees based on an annual percentage of assets managed, which provides a greater incentive to invest in low-cost ETFs.
The updated data through the second quarter reveals a rising trend in the fund industry: individual investors’ ETF assets are increasing at a faster rate than mutual fund investments in dollar terms and on a percentage basis.
Polefrone also pointed out that securities firms have been acquiring a lot of smart beta ETFs. These smart beta or alternative index-based ETFs track specific factors in an attempt to outperform traditional market capitalization-weighted indices.
The smart-beta ETFs are one of the fastest growing areas of the ETF industry. For instance, currency-hedged ETFs that try to diminish currency risk with investing in overseas markets have been a popular play this year due to the strengthening U.S. dollar and weakening foreign currencies. [The Growth of This Currency Hedged ETF is Simply Stunning]
“Overall, smart beta ETFs accounted for 17% of US net ETF inflows in 2014, despite representing less than 11% of total assets. Today there are more than 350 smart beta ETFs available in the U.S. comprising over $230 billion in AUM, up from just 212 products and $64.8 billion in 2010,” according to the PowerShares study. [This ETF Helped Start the Smart Beta Phenomenon]
Nevertheless, the mutual fund industry still overshadows the fledgling ETF industry. Retail investors held about $4.84 trillion in mutual funds, compared to $1.39 trillion in ETFs.
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.
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.