ETFs show continued growth

While it seems just about everything else in this market is going down, exchange-traded funds may surprise you. As of September, ETFs had a net inflow of $82 billion, writes Scott Burns at Morningstar. In comparison, the open-end market fell nearly $1.5 trillion, he says, excluding money market funds.

Burns offers three theories as to why ETFs are still gathering assets:

  1. ETFs provide stock-like daily price movement and offer diversification. Burns asks, "When the S&P 500 and other broad indexes gyrate 5 percent to 10 percent on any given day, why would you buy Apple when you could just buy PowerShares Nasdaq 100?"
  2. Asset allocators are using ETFs as part of a long-term strategy, so they aren't panicking through the multiple downturns we've experienced. "We would expect them to rebalance at some time, but they will most likely be selling bond ETFs to buy equity ETFs," he says.
  3. Investors are favoring index strategies over actively-managed funds. "It only makes sense that overzealous investors would get a little gun shy about active managers and their fees after being burned in a market crash," Burns says, attributing ETFs continued popularity to low-cost, tax-efficient asset allocation strategies.
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