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ETF Inflows Continue

Investors keep pouring money into ETFs, with more than $8 billion in new money invested in ETFs and related exchange traded products in June according to National Stock Exchange, Inc. (NSX).  Year-to-date, that figure is now up to a staggering $58 billion, an increase of nearly 47% from the same time period last year.

Total assets in exchange traded products now total nearly $1.1 trillion, a 39% increase compared to assets at the end of June 2010.  With over $1 trillion now invested in ETFs, it’s clear that investors and advisors alike are fully embracing ETFs.  With potential benefits such as lower expense ratios, greater tax efficiency, flexibility and transparency, the strong inflow of assets into ETFs shows no signs of slowing.  And with ETFs making significant inroads into 401k plans, the growth is likely just beginning.

Active Mutual Fund Managers Losing Market Share to ETF Asset Allocators

A recent Bloomberg article highlights a growing trend that shows no signs of slowing:  managers using ETFs to build stand-alone portfolios continue to take market share away from traditional actively managed mutual funds.  Legg Mason’s Bill Miller, who has been one of the more popular active fund managers, concedes in the article that “ETF asset-allocation products are a permanent share taker from traditional asset managers like ourselves”.

So what’s driving this trend?  Portfolio managers are placing a greater emphasis on asset allocation and relying less on trying to pick individual stocks and bonds.   A landmark study of large pension funds concluded that, on average, more than 90% of the variation in portfolio performance could be attributed to asset allocation.  With the proliferation of ETFs, portfolio managers now have tools that weren’t readily available even a few years ago and can more easily implement robust asset allocation strategies.  ETFs allow for easy access to a wide variety of asset classes including alternative investments (commodities, currencies, real estate, etc.) which have historically been uncorrelated to equity and bond markets.  In addition, ETFs offer potential benefits such as lower expense ratios, greater tax efficiency, and more transparency.

The bottom line, as Scott Burns (head of Morningstar’s ETF research) points out in the article, is that “there’s a shift going on from seeking outperformance on an individual-company basis to seeking it on a macro basis”.  And more and more portfolio managers believe ETFs are the best way to access this “macro” exposure.

Convert Your Overpriced Mutual Fund Portfolio to ETFs

Investors stuck in expensive actively managed mutual fund portfolios may have a desire to move to more cost effective investment options, but may not know exactly where to begin.  ETF Database makes available a great tool to help map any actively managed mutual fund to a lower cost ETF alternative.  Their Mutual Fund to ETF converter contains information on the 10,000 largest U.S. mutual funds and finds the most comparable ETF based on the underlying benchmark for each fund.

For example, using two of the most popular actively managed mutual funds – American Funds Growth Fund of America (ticker:  AGTHX) and PIMCO’s Total Return Bond Fund (ticker:  PTTAX) yields a number of less expensive ETF options tracking the same benchmark index as the actively managed funds.  ETF alternatives for AGTHX, which uses the S&P 500 Index as a benchmark, include SPY and IVV, both of which have expense ratios nearly a tenth of that of AGTHX.  ETF options for PTTAX – which tracks the Barclays Capital U.S. Aggregate Bond Index – include AGG and BND, with expense ratios nearly a half and a quarter, respectively, of PTTAX’s expense ratio.  Interestingly, not only are the ETF options cheaper, but both SPY and IVV have outperformed AGTHX over the last two years, while AGG and BND have nearly equaled the performance of PTTAX with significantly less volatility over the same timeframe.  Whether you’re looking to transition your portfolio to all ETFs or simply curious as to whether you’re being overcharged for investment returns that can be achieved through lower cost ETFs, this conversion tool can be a valuable resource.

Schwab Bringing ETFs to 401(k) Plans

As was recently reported in The Wall Street Journal, brokerage firm Charles Schwab is now leading the charge on bringing exchange traded funds (ETFs) to 401(k) plans.  By now, most investors have become at least somewhat familiar with ETFs and the benefits they can offer including lower fees, greater transparency, and easier access to a wider variety of asset classes.  ETF assets have quickly grown to nearly $1 trillion and show no signs of slowing.  However, employer sponsored 401(k) plans have been slow to adopt ETFs as an investment option for plan participants.  One of the primary reasons for this is that 401(k)s have traditionally been the gravy train for large mutual fund companies to grow their typically expensive actively managed mutual funds.  Look under the hood of any all-mutual fund 401(k) plan offering and it’s not unusual to see average mutual fund expense ratios run 1% to 1.5%+.  Compare that with the average expense ratio of an all-exchange traded fund offering, which typically runs 30bps to 50bps.  Obviously, large mutual fund companies are hesitant, if not outright reluctant, to offer products that may significantly eat away at healthy revenue streams – even if those products may be more beneficial to individual plan participants.

That makes Schwab’s foray into this space even more impressive as the company seems focused on doing what’s right for investors, while also recognizing that the future of their company may very well depend on being a leader in the mushrooming ETF space.  As we’ve discussed in the past, Schwab has continued to expand their own proprietary ETF offerings with a focus on broad based ETFs at rock bottom expense ratios.  Without a doubt, these ETFs will be the centerpiece of Schwab’s 401(k) investment menu, though Schwab is expected to offer ETFs from other providers as well.  In referencing the mood of the large mutual fund companies and brokerages attending the asset management conference where Schwab made their announcement of bringing ETFs to 401(k)s, Mike Alfred, co-founder of an independent rater of 401(k) plans told the Wall Street Journal, “You could tell the rest of the room was nervous about it.  The idea is disruptive.”

At The ETF Store, we’ve partnered with several 401(k) providers and currently offer a number of all-ETF 401(k) plans to businesses.  We’re extremely pleased with the leadership Schwab is taking in this arena and believe this will only help to enhance the existing all-ETF 401(k) offerings and bring additional awareness of the potential benefits of ETFs to a larger group of investors.

A Better Way To Invest With Bill Gross?

Recently, PIMCO and renowned bond fund manager Bill Gross filed for registration to list an exchange traded fund (ETF) version of their highly popular PIMCO Total Return Fund.  This is just the latest example of active mutual fund managers attempting to move into the mushrooming ETF space.  Previously, active mutual fund managers have been reluctant to offer ETFs because of the daily disclosure requirements.  Unlike mutual funds, which are only required to disclose holdings on a quarterly basis (and 60 days in arrears at that), ETFs are required to disclosure their holdings daily – so investors always know exactly what they own.

As investors demand more transparency in their investments, mutual fund managers are realizing that they can either watch assets flow out of their mutual funds or operate their fund transparently via an ETF.  Give credit to PIMCO and Bill Gross for having the confidence to open the curtain on their most popular mutual fund and allow investors the opportunity to invest with greater transparency.  As Dave Nadig of IndexUniverse points out in the article, this move by PIMCO “puts the nail in the coffin for active managers who need to hide in the world of non-disclosure and poor transparency”.