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Exchange-traded funds have enjoyed a nearly uninterrupted rise in popularity during the past decade. But so have their cousin index mutual funds.
At the end of 1998, ETFs had just $13.7 billion in assets. By last year, those were up to nearly $534 billion. That’s a pretty impressive run, especially considering that last year represented the first net fall in assets for the industry.
By contrast, actively managed mutual funds have actually been losing market share since 1998. At the same time, index mutual funds have more than doubled their asset base. In fact, through the end of July, Morningstar data showed index mutual funds with 9.52% of the open-end fund industry’s assets. ETFs, meanwhile, held some 8.93%.
The slight lead by index mutual funds over their largely index-based ETF rivals might not seem surprising, given mutual funds’ huge head start. After all, active mutual funds still control roughly 81.56% of the total market. Consider the table below depicting the growth in net assets by each type of fund:
|
Year
|
Exchange-Traded Funds
|
Index Mutual Funds
|
Active Mutual Funds
|
|
1998
|
$13.7 billion
|
$245.1 billion
|
$3.1 trillion
|
|
1999
|
$23.1 billion
|
$362.9 billion
|
$3.9 trillion
|
|
2000
|
$35.3 billion
|
$358.5 billion
|
$3.8 trillion
|
|
2001
|
$49.8 billion
|
$347.6 billion
|
$3.6 trillion
|
|
2002
|
$102.1 billion
|
$305.1 billion
|
$3.3 trillion
|
|
2003
|
$151.6 billion
|
$425.3 billion
|
$4.2 trillion
|
|
2004
|
$228.1 billion
|
$522.6 billion
|
$4.9 trillion
|
|
2005
|
$298.7 billion
|
$586.8 billion
|
$5.5 trillion
|
|
2006
|
$416.8 billion
|
$719.8 billion
|
$6.6 trillion
|
|
2007
|
$612.6 billion
|
$845.6 billion
|
$7.6 trillion
|
|
2008
|
$533.9 billion
|
$596.0 billion
|
$4.9 trillion
|
Source: Morningstar Inc.
But net assets don’t always provide the best view of fund trends. Assets are the combination of appreciation and how much money goes in and out of portfolios. Last year, when the market got pummeled, a big part of lower asset levels came from losses in stock and bond values in the market.
Net inflow data provide a better sense of investment sentiment. Look at what those numbers showed in the past 10 years through 2008:
|
Year
|
Exchange-Traded Funds
|
Index Mutual Funds
|
Active Mutual Funds
|
|
1998
|
$5.1 billion
|
$42.5 billion
|
$158.2 billion
|
|
1999
|
$6.1 billion
|
$56.7 billion
|
$101.8 billion
|
|
2000
|
$12.6 billion
|
$16.7 billion
|
$176.4 billion
|
|
2001
|
$18.5 billion
|
$22.6 billion
|
$122.9 billion
|
|
2002
|
$39.9 billion
|
$20.9 billion
|
$144.4 billion
|
|
2003
|
$13.2 billion
|
$33.9 billion
|
$226.9 billion
|
|
2004
|
$50.9 billion
|
$42.0 billion
|
$235.9 billion
|
|
2005
|
$51.3 billion
|
$23.3 billion
|
$251.9 billion
|
|
2006
|
$59.9 billion
|
$39.7 billion
|
$365.4 billion
|
|
2007
|
$139.7 billion
|
$68.9 billion
|
$313.6 billion
|
|
2008
|
$157.2 billion
|
$42.8 billion
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-$143.5 billion
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Source: Morningstar Inc.
Index and active mutual funds suffered slowdowns in the tech wreck years. It took until 2003, when markets actually rebounded, before flows chilled in ETFs. The other two fund types were already heating up, however.
After 2003, ETFs took off again and even managed to gain more creations than redemptions last year. But as markets cooled in 2005, so did index fund flows. Perhaps the rather shallow pullback gave investors confidence that managers could squeeze a bit more out of stocks than their respective benchmarks. Indeed, after double-digit returns the previous two years, the SPDR S&P 500 Index ETF (NYSEArca: SPY) gained 4.9% in 2005. The next year, it resumed moving forward by adding another 15% for that 12-month period.
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