U.S.-listed exchange-traded funds attracted $188.4 billion in 2013, just shy of 2012’s record $190.1 billion haul. Those inflows represent a growth rate of about 14% of beginning assets compared with the projected growth of about 3% for long-term mutual funds. Strong inflows, combined with market appreciation, have allowed ETF assets to hit $1.7 trillion, or about 13% of long-term mutual fund and ETF industry assets. Let's take a look at some things we can learn from these strong ETF flows.
ETF Investors Are Different From Mutual Fund Investors
Interest in emerging markets has been strong over the past decade, thanks to improving economic fundamentals and soaring stock markets. Naturally, investment flows have followed. The investment prospects for emerging markets dimmed in 2013 as the bull market in commodities ended, the Fed's talk of tapering created liquidity concerns, and developed-markets economies improved. Investors following a tactical, market-timing model would likely have sold emerging markets, whereas long-term investors should have rebalanced into emerging-markets stocks. ETF investors sold roughly $6.6 billion out of funds in the diversified emerging-markets category while mutual fund investors bought $39.0 billion. ETFs such as Vanguard FTSE Emerging Markets (VWO) and iShares MSCI Emerging Markets (EEM) are heavily owned by institutions, at least 65% for each. In contrast, it is likely that the mutual funds are predominately owned by individual investors.
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Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.