2012’s Two Tales Of Equity Fund Flows

January 10, 2013

Equity ETFs raked in assets last year, while equity-focused mutual funds bled. So what gives?

Investors poured money into equity ETFs last year, while at the same time pulling money out of equity mutual funds, the latest sign of what appears, at first blush, to be a zero-sum game in the world of funds that has favored lower-cost ETFs over mutual funds for the past few years.

More than $121 billion flowed into equity ETFs in 2012, making up almost two-thirds of the record $188 billion that flowed into U.S.-listed exchange-traded funds last year, according to data compiled by IndexUniverse.

At the same time, about $147 billion moved out of mutual funds focused on the world of stocks, though the more than $300 billion that flowed into bond mutual funds kept net flows into mutual funds in 2012 positive—to the tune of $206 billion, according to data published by the Investment Company Institute, the mutual fund industry’s Washington, D.C.-based trade group.

“Many investors still believe the actively managed bond story, while fewer and fewer investors are willing to believe the actively managed equity story,” IndexUniverse Director of Research Dave Nadig said, explaining the divergence of flows into bond mutual funds and outflows from equities mutual funds.

“Once you're on board with indexing, ETFs make vastly more sense as your choice of exposure for all the obvious reasons: cost, tax efficiency, liquidity and transparency,” Nadig said.

That’s not to say bond ETFs had a weak year. To the contrary, U.S.-focused fixed-income ETFs pulled in almost $44 billion, while internationally focused bond ETFs attracted upward of $12 billion, for a total of $56 billion, or almost 30 percent of the $188 billion record total.

Tracing The Flows

One thing that seems clear is that, notwithstanding the flows out of equity mutual funds, money is definitely not moving out of capital markets, Nicholas Colas, senior market strategist at ConvergEx Group told IndexUniverse in a recent interview.

Colas reckons that about half the money moving out of equity mutual funds is moving into bond mutual funds, while the other half is moving into equity ETFs.

“I think that the growth will, to some degree, mirror what we’ve seen already in equities,” Colas said in the interview about the trajectory of bond ETF growth. “It’s just a later start. It’s maybe five years behind, just in terms of recognition.

So, will bond mutual funds eventually start losing assets to bond ETFs, as is the case in the world of equities?

Probably, according to Nadig:  “The ETF paradigm is just too compelling to stop, especially with increased capital gains tax rates.”



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