ETFs Still Small But Growing Fast

The biggest trend when it comes to fund flows is the movement from mutual funds to ETFs which are passive investments. The trend is important because it effects markets. It’s also rare historically in the sense that the strategies that most non-professional investors use to save for retirement and other big-ticket items like college don’t change that often. This isn’t like a fund manager who is constantly changing his/her process. These processes become engrained as the average person with a 401-K doesn’t know much about investing and doesn’t apply much rigor to the decision. The fact that most mutual funds were able to underperform their benchmarks in the past decade and still maintain a stranglehold on the investment landscape shows how entrenched strategies become. If a firm’s profit growth underperformed the market and its sector for 10-years, it wouldn’t be touched by investors. A stock could lose favorability after one bad quarter, but some investors stick with mutual funds after several bad years. Therefore, the shift to ETFs is very important. Finally, the average investor said he/she was done with high mutual fund management fees for bad performance.

I have spoken to these people and you can tell they are very angry with past performance. They decided to move their funds into a Vanguard ETF and are unlikely to change their minds and switch back. It’s important to get a grasp for the scope of this situation to see the trends in place. I’ve showed previous charts of the inflows into ETFs and the outflows from mutual funds, but I haven’t showed the current scenario. As you can see from the chart below, the assets under management for mutual funds is $21.382 trillion and the assets under management for ETFS is only $2.555 trillion. The annualized growth rate for mutual funds is 0.8% and the annualized growth rate for ETFs is 21.4%. It’s amazing to see how the market has already been so effected by ETFs even though they are still a small portion of the total money in the market. If this trend continues, it will become much easier to pick stocks. It will be the golden age for stock pickers in the next few years. Only that change can reverse this trend because then people will see how easy it is to pick stocks and try to hop on that bandwagon.