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.