ETFs inflows best mutual funds…in the U.S., anyway

What can we learn from ETF inflows?

April 2, 2015

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Exit SignExchange-traded fund (ETF) assets in Canada are a mere drop in the ocean compared to mutual fund assets—ETFs represent less than 10% of the fund assets Canadians hold—that’s $81 billion for ETFs versus $1.2 trillion for mutual fund assets. As ETFs hit the 25-year mark it sometimes seems like an upward battle when it comes to growing ETF assets and educating Canadians about their benefits.

The advent of the Client Relationship Model 2 (CRM2) could boost growth in the ETF space—advisors will be required to break out the cost of advice, including any commissions or fees tied to mutual funds (these are sometimes embedded in the cost of advice). If all goes well, it could put the spotlight squarely on costs and might push more advisors to use low cost ETFs in their portolios. Time will tell…

That’s Canada—in the U.S., however, last week’s news told a different story, as ETF inflows bested mutual funds.

But not for reasons that you might think: U.S. investors aren’t hauling their money out of mutual funds to put them in low cost ETFs. Rather, institutional investors are playing a more important role in the shifting asset space.

According to Reuters, of the $5.7 billion than flowed into stock funds during the week ended March 25, all it went into ETFs and mainly involved hedge funds and other institutional investors.

All told, U.S.-based stock ETFs saw $7.3 billion of net inflows while U.S.-based stock mutual funds posted $1.6 billion of cash withdrawals.

Reports Reuters, it’s a tale of two opposite ends of the investor spectrum, where the experience with markets is decidedly different:

“Flows activity this week reflected two views of the world: the retail mom-and-pop side sees four out of five down days on the Dow and sells, the ETF community sees the same down days and buys. They are buying on the dip,” said Jeff Tjornehoj, head of Lipper Americas Research.

So, as smaller investors fled the markets as they roiled during the week, institutions poured more money in.

What can we learn from this tale of two ETF markets? That the interplay between institutional and retail use of ETFs will continue to be important, and could diverge as different levels of investors respond differently to volatility and its impact.

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