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You’re Fired: Investors Drop Underperforming Fund Jockeys and Buy ETFs


Not getting enough bang for their buck, disillusioned investors have reduced their positions in underperforming actively managed mutual fund investments. Instead, more are turning to low-cost, index-based exchange traded funds as a way to keep exposure to the broader markets.

Investors have redeemed $119.3 billion from U.S. stock funds in 2012 through November, the largest yearly outflow since 2008, reports Kirsten Grind for The Wall Street Journal.

Meanwhile, U.S. stock ETFs attracted $30.4 billion over the same period. Moreover, along with new bond ETF inflows, total inflows to ETFs were $154 billion, which incidentally was the larges inflow since 2008. [Traders Using ETFs in Place of Individual Stocks]

Mutual fund observers noted that the trend picked up in December, with ETF inflows rising to $28.1 billion, compared to $20.6 billion in November, according to the WSJ article.

After a string of large stock oscillations, investor confidence has taken a hit. Additionally, it has been hard on stock pickers as equity fund managers largely underperformed benchmark stock indices. Consequently, more are willing to just passively track indices through low-cost ETFs – the average ETF expense ratio is about 0.55%.

Wall Street got most 2012 market calls wrong, Bloomberg reports. The Bloomberg Global Aggregate Hedge Fund Index, which tracks the average performance of the $2.2 trillion industry, rose 1.6% in 2012 through November. Over 65% of mutual funds benchmarked to the S&P 500 underperformed the benchmark.

“They paid too much attention to the fear du jour,” Jeffrey Saut, chief investment strategist at Raymond James & Associates, said in the Bloomberg article.

“There has been an overriding theme of anxiety among investors about the stock market,” Avi Nachmany, director of research at Strategic Insight, said in the WSJ story. “Those companies whose total focus on stocks are suffering.”

According to Morningstar data, U.S. large growth stock mutual funds returned an average 15.3% over 2012, whereas similar ETF products garnered 16.4%.

“ETFs have really won people over,” Deborah Fuhr, a partner at ETFGI LLP, said in the WSJ report.

For more information on ETFs, visit our ETF 101 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.