The amount of money invested in U.S.-listed exchange traded funds has grown by more than 10% so far this year. One reason may be investors’ growing disillusionment with active mutual fund managers who have a hard time beating their benchmarks.
Instead, some investors are moving to the diversification, transparency and lower fees of index-linked ETFs.
Year to date through the end of May, U.S.-listed exchange traded product assets have increased by 10.4% to $984 billion, according research from manager BlackRock. The growth has been driven by higher asset prices and $50.5 billion of net new assets.
“Rock star” fund managers seem to come and go, often flaming out after bursts of chart-topping performance. ETFs, on the other hand, doggedly track indexes and investors know exactly what they hold in the portfolio.
ETFs are transparent, low cost and tax efficient investment tools that may be used by any investor. Most ETFs passively track an underlying benchmark. What you see is what you get.
With an actively managed mutual fund, an investor is basically betting on the skills and expertise of the portfolio manager.
Legg Mason’s Bill Miller is among the legions of fund managers that fell from grace during the financial crisis. Miller’s streak of outperforming the S&P 500 for 15 straight years through 2005 at Legg Mason Value Trust, a mutual fund, was legendary.
However, the concentrated portfolio took a huge hit in the credit meltdown as some financial-sector holdings were essentially wiped out, The Wall Street Journal reported in December 2008.
The fund last week revealed it realized a loss of $551 million after selling a big chunk of Eastman Kodak shares, Bloomberg recently reported. The fund kept most of its stake in Kodak for more than a decade and sold the stock only after the film company had lost more than 90% of its market value, according to the report.
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