Fine Young Cannibals

So much for not selling at the bottom. October 2008, unequivocally Wall Street’s worst month of the financial crisis thus far, saw more cash pulled out of long-term mutual funds—stocks, bonds and hybrids—than any other month in history: $127.55 billion. It was twice the $63.82 billion outflow seen in September, the second worst month ever, according to the Investment Company Institute (ICI).

Of October’s total, 57%—or $72.44 billion-came out of equity funds, reports ICI. In September 2008, the month that saw the bankruptcy of Lehman Brothers and the bailouts of Freddie Mac, Fannie Mae and AIG, 88% of the outflows-that is, $56.36 billion—came out of stock funds. Although outflows began to slow in the final months of the year, the trend continued.

That’s a lot of money to be swirling around. Yet while asset values fell, and cash poured out of mutual funds like water from a broken main, ETFs experienced net cash inflows. In 2008, $245 billion poured out of equity mutual funds alone, while $140 billion net cash entered equity ETFs, according to TrimTabs Investment Research. Much of those equity fund outflows went into money market funds. Still, for every two dollars that exited equity mutual funds, equity ETFs took in more than $1.

Are ETFs really cannibalizing 50% of mutual funds’ assets? That may be doubtful, but the number could be as high as 25%, say analysts. ETFs’ distribution crosses various markets, thus making it difficult to establish a correspondence among the money flows. State Street Global Advisors, the firm with the largest ETF in the world, the SPDR S&P 500 ETF (SPY), estimates that half of all ETF assets reside with traditional institutional firms, 35% to 40% come from the retail clients of investment advisors and the rest from self-directed investors.

For the full article go to Financial Planning magazine.

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