Even after a two-month stock market rally, market volatility remains high. Simply put, investors are worried, not only over the timing of an economic recovery, but also by the possibility that the recent surge in equities may be little more than another bear market rally. The uncertainty bodes well for the popularity of low-cost exchange-traded funds (ETFs) that allow investors to jump into and out of positions with great agility throughout the trading day.
Total ETF assets increased by $49 billion, or 10.2%, for the month, to $531 billion at the end of April, according to State Street Global Advisors’ (STT) April ETF Snapshot report. Since 2002, assets have increased more than fivefold, as the number of ETFs has grown more than eightfold.
The ongoing net flows of money out of open-end mutual funds and into ETFs is mainly the result of the drop in the stock market in the last few months of 2008 which “freed up the tax handcuffs” among investors, says Noel Archard, managing director for product research and development at iShares. Archard points out that investors stood to incur a much smaller tax bill, if any, from pulling money out of conventional mutual funds after the market downdraft. The poor performance by many mutual funds, coupled with the capital gains distributions they had to pay out, only added to investors’ eagerness to shift into tax-efficient ETFs, he adds. He estimates that roughly $170 billion in assets migrated from mutual funds to ETFs last year.
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