January 7, 2011

ETFs Top Mutual Funds in Q4 Flows, Lipper Says

Equity fund flows into ETFs were close to $37 billion vs. $18 billion for mutual funds in the fourth quarter of 2010

U.S.-domiciled mutual funds had a strong fourth quarter in terms of their performance, according to Lipper data, but they could not keep up with exchange-traded funds in terms of inflows.

Equity-focused ETFs had inflows of $36.7 billion in the last three months of 2010, says Lipper analyst Matthew Lemieux, and that handily topped inflows of $18.4 billion for equity-focused mutual funds.

Preliminary research by Lipper also found that mutual funds in the U.S. diversified-equity fund (USDE) category -- an important barometer for the investment industry -- had outflows of $12 billion in the fourth quarter. At the same time, ETFs in this category attracted $16.5 billion.

“As investors move from being out of the market to getting into it, they appear to be risk adverse and thus favor passive, index-based investments like ETFs,” said Lemieux in a phone interview Friday. Extensive marketing efforts on the part of ETF distributors, financial advisors and discount brokers are contributing to this trend, he adds.

Also, he notes, institutional money seems to move more aggressively into ETFs in the fourth quarter. “ETFs do particularly well at the end of the year,” Lemieux explained.  

Overall, funds in this USDE category improved 11.14% in the quarter and were up 17.14% for the year, Lipper says.

In the sector-equity funds category, mutual funds had inflows of $7.2 billion in the fourth quarter, but ETFs in this group drew $10.1 billion.  

The situation in the world-equity funds and fixed-income categories, however, was the reverse.

World-equity focused mutual funds collected $23.3 billion in fund flows in the fourth quarter and ETFs about $10.1 billion.

World equity and natural-resource investors appear “to be more comfortable with an experienced fund manager” in these categories, Lemieux said.

In fixed income, both taxable and tax-exempt, mutual funds attracted $3.3 billion in the final period of 2010, and ETFs in this group had outflows of $2.4 billion.

While ETFs are attracting interest, they continue to represent a minority of fund assets, Lemieux points out. “Yes, they are gaining ground but are still small overall.”

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