As the mutual fund industry squirms under growing allegations of wrongdoing, providers of exchange-traded funds and separately managed accounts may be cheering in the background.
Replacing funds implicated in recent scandals with funds that haven’t been involved may not be a popular strategy, because it’s unclear which funds will be next to be named by regulators. Although numbers aren’t yet available, fund watchers say that some wealthy and tax-savvy individuals already are turning to alternative investments. The mutual fund scandals will just provide “an extra bump in the growth” of these products,” says Gerry O’Connor, a director with the research firm Spectrum in Chicago.
Exchange-traded funds are baskets of securities that trade like stocks. Separately managed accounts are customized portfolios overseen by professional money managers. Of course, these products carry their own risks and limitations. For one, they may be managed by the same firms that are entangled among the allegations of market timing and late trading, practices that benefited certain privileged investors at the expense of others.