ETF Assets Are Catching Up to Index Mutual Funds
February 21, 2014

The mutual fund industry is losing ground to upstart exchange traded funds as more investors and financial advisors turn to the low-cost, transparent and easy-to-use ETF wrapper.

“We’re finding ETFs make a lot of sense for investors like ourselves, not just traders,” Ron Vinder, managing director at UBS Wealth Management, said in a Wall Street Journal report.

Index-based ETFs typically cost less than most actively managed funds – the average U.S.-listed ETF charges 0.6% in annual fees, compared to index mutual funds with a 0.8% expense ratio and active mutual funds that charge 1.3%, according to Morningstar data.

Additionally, ETFs disclose component holdings on a daily basis and can be traded throughout the day, like stocks.

As of the end of 2013, ETFs made up 12% of the $13.9 trillion U.S. mutual fund and ETF market – ETFs held $1.61 trillion in assets under management at the end of last year, compared to about $1.69 trillion for index mutual funds. Currently, there are 1,563 U.S.-listed ETFs with $1.69 trillion in assets, but to be fair, there are 83 actively managed ETFs with $15.2 billion in assets.

“2013 was the year when assets of ETFs essentially caught up with those of index mutual funds,” Sebastian Mercado, an ETF analyst for Deutsche Bank, said in the article.

Mercado points out that index funds at 12.2% of the overall market is “virtually even” with ETFs for the first time.

Meanwhile, Deutsche Bank calculates that active mutual funds held $10.6 trillion with a market share of 76.2% at the end of 2013, down over 95% in 1998, as ETFs gain a greater following.

“We’re seeing most of the innovation in new styles and benchmarking strategies now coming in the form of ETFs rather than index mutual funds,” Vinder said.

Vanguard is witnessing higher demand for its ETFs. Joel Dickson, a senior investment strategist at Vanguard, attributes the growing demand from financial advisors and their clients to the industry’s shift away from charging commissions to a fee-based structure where investors pay fees on a percent of assets. Consequently, low-cost ETFs have become a very popular investment option among advisors. [Vanguard Keeps on Hauling in ETF Assets]

For more information on ETF fund flows, visit our ETF performance reports 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.