Morningstar reported that $8.5 billion bled out of U.S. equity-focused mutual funds in July, which is not surprising given all the eurozone-related volatility coursing through markets last month. But equities ETFs pulled in $12 billion in July, according to data compiled by IndexUniverse, a tale of two investment vehicles that says a lot about the strengths of ETFs.
The ETF structure’s inherent liquidity benefits and lower costs relative to mutual funds are what's behind investor demand for the exchange-traded funds, Magoon Capital’s CEO Christian Magoon told IndexUniverse in an interview.
From a cost perspective, it makes sense to access stocks through cheaper exchange-traded vehicles, because when the stock market is delivering lower returns in capital appreciation and dividends, expense ratios become more important, Magoon said.
“End-of-the day pricing is a tough pill to swallow when comments from around the world—i.e., Draghi or China—can easily move markets in material and unexpected ways throughout the day,” he added, referring to intraday liquidity issue. “Investors are less likely to take the chance of a blind buy or sell transition in mutual funds at the end of the day.”
In July, stocks first sold off sharply, then rose at the end of the month as the market focused on the eurozone's evolving debt crisis and grew jittery over its impact on global economic growth. By the end of the month, the Dow Jones industrial average was somehow 1 percent higher, at 13,008.68.
Funds like the SPDR S'P 500 ETF (SPY) hauled in $2.90 billion in new assets in July alone, pushing its total assets to near $108 billion. SPY, the world’s largest ETF and the first one listed in the United States, was launched in January 1993.
In all, investors poured some $16 billion into ETFs in July—three-quarters of it into U.S. equities—making the haul the second-highest monthly total since the $28 billion that flowed into ETFs in January. Last month’s flows, including the market’s rise, lifted total U.S.-listed ETF assets 2.6 percent to $1.209 trillion.
Bonds Tell A Different Tale
While equity ETFs are valued for their intraday tradability, liquidity and lower costs, those traits aren’t yet enough to offset the “nascent nature” of ETFs that serve up access to fixed income.
In the bond space, investors poured $29 billion into fixed-income mutual funds in July—particularly into those offering high-yield bonds, according to Morningstar, a Chicago-based financial markets data provider.
Fixed-income ETFs meanwhile raked in just $1.5 billion, and only $216 million was tied to domestic debt funds, according to San Francisco-based IndexUniverse.
Bond ETFs are by many measures in their infancy, and it may take a while for them to be as liquid or accessible as equities ETFs, Magoon said.
But that disparity could also be explained by investor concerns over trading fixed-income ETFs at premiums/discounts to their net asset values, which can be more prevalent outside equities, Gene Koyfman, IndexUniverse analyst said.
In a recent interview with IndexUniverse, Rick Ferri, founder of investment firm Portfolio Solutions, alluded to that same problem, noting that in his company’s portfolios, he too opts for fixed-income mutual funds over ETFs when he can.
“On the bond side, we are using all open-end mutual funds,” Ferri said. “I don’t want to have any liquidity problems with ETFs on bonds because if the stock market goes down and I want to sell bonds, I don’t want to get hit with some sort of a discount on a bond ETF while I’m trying to sell.”
“If I sell an open-ended fund, I’m going to get NAV at the end of the day,” he said.
Bond Demographics
Another factor that could be swaying investors toward mutual funds over ETFs in the bond space is demographics.
“These flows are likely an older demographic that is less aware of ETFs and more programmed to be mutual fund investors,” Magoon said. “They also have experienced far better performance in their bond mutual funds than their stock mutual funds, so are probably less likely to look for an alternative.”
Year-to-date, U.S. stock mutual funds have bled more than $51.28 billion in assets, while taxable and municipal bond funds have raked in more than $171.84 billion, according to Morningstar.
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