A new Vanguard study finds that lower-cost mutual funds and ETFs have attracted the predominant portion of investor dollars over the past decade. Experts caution, though, that poor market timing and other factors can mitigate the benefits of these lower costs.
In “Costs Matter: Are Fund Investors Voting With Their Feet?” Vanguard found that in five fund categories, investors favored funds with lower expenses, directing between 55% and 93% of cumulative net cash flow to the lowest-expense quartile of funds, the fund company said in a statement .
“It is clear from our analysis that investors are increasingly gravitating toward low-cost funds and ETFs,” said Francis Kinniry, Jr., principal, Vanguard Investment Strategy Group, in a statement. “The trend to low-expense funds is very encouraging.”
Kinniry says that the growing popularity and availability of index funds and index-based ETFs has likely encouraged the move to low-cost products. He also notes that a similar shift has taken place among actively managed funds, as lower-cost active equity funds attracted more assets relative to their higher-cost counterparts.
The Vanguard analysis focused on monthly fund-level cash flow data from Morningstar for the 10-year period ended December 31, 2009.
The study also found that:
– Some 80% of fund assets are held through financial advisors and corporate retirement plans.
– In the advisor market, a move from a transaction-oriented, commissioned-based model to a fee-based model likely abetted the low-cost trend.
– By contrast, the historically generous stock and bond returns of the 1980s and 1990s resulted in investors focusing on high absolute returns and paying little attention to costs.