(Updated with background and new information throughout.)
Exchange-traded funds pulled in twice as much new money as mutual funds did in 2011 in what amounts to the latest sign that the ETF juggernaut is gathering momentum, increasingly at the expense of mutual funds.
Traditional mutual funds gathered $58.58 billion in net new money in 2011, according to estimates by Morningstar, the Chicago-based financial data firm. That compares to inflows of more than $119 billion into ETFs last year, according to data compiled by IndexUniverse.
It’s a surprising outcome in that the mutual fund industry is about seven times as big as the ETF industry in terms of assets under management.
According to Morningstar, $7.7 trillion was invested in long-term mutual funds at the end of December 2011, a figure that excludes money market funds. IndexUniverse data show that ETFs ended the year with $1.062 trillion in assets.
The divergent flows paint the picture of a landscape that’s slowly changing, as investors and advisors wake up to ETFs. Much of the allure of ETFs has to do with their low costs, tax efficiency and, for those investors who watch their holdings like hawks, their tradability. Most of the advantages have to do with the fact that the vast majority of ETFs are index funds.
To that point, the flows story is even worse for actively managed mutual funds, as new money moving into passively managed index funds accounted for all the positive flows mutual funds experienced. According to Morningstar, index mutual funds pulled in $66 billion in positive inflows in 2011. Remove that figure and actively managed mutual funds actually saw outflows.
Appropriately enough, the indexing shop Vanguard Group was the most successful firm, while the lowlight for the fund industry was American Funds, which hemorrhaged $81.5 billion for the year, the Morningstar report said.
“To put this in perspective, American Funds’ Growth Fund of America not only had the greatest outflows of any other fund, but of any other family, with an estimated $33.1 billion in net redemptions, which easily beats Fidelity's $28.1 billion in outflows,” the Morningstar report said.
Morningstar said that the mutual fund flows estimates were compiled on Jan. 10, and that the aggregated figures don’t include tallies from Calamos.
Divergent Equity Flows
Morningstar said that U.S. stock mutual funds continue to be the locus of much of the redemptions, shedding $98.8 billion last year.
It noted that in a year when the stock-market performance ended essentially flat, 2011 was the worst year for outflows since investors pulled $121 billion off the table in 2008, the year of the frightful market collapse. International stock mutual fund flows were essentially flat.
By contrast, U.S.-focused equity ETFs pulled in almost $41 billion last year, while international stock funds pulled in more than $23 billion, according to data compiled by IndexUniverse.
Morningstar noted that one of the bigger trends of the year was the relative success of passive strategies.
Without the inflows into passive funds, actively managed funds of all stripes shed about $6.7 billion in 2011.
“As a result, actively managed funds’ overall market share fell to 87.1 percent from 87.6 percent, while long-term passively managed funds climbed to 12.9 percent from 12.3 percent,” the report said.
As in the world of ETFs, Vanguard was, as noted, the most successful mutual fund firm, pulling in $29.5 billion in new assets last year.
But, in line with the broader pattern, Vanguard gathered even more ETF assets—over $35.5 billion, according to data compiled by IndexUniverse.
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