Step 11: Risk Exposure

Index Fund Assets Still on the Rise

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Step 11: Risk Exposure

The Investment Company Institute (ICI) published its annual Fact Book back in May, which addressed the recent trends in the mutual fund and exchange traded fund investment strategies. One of the most common trends that the ICI saw in 2014 was the large inflow into index funds from investors, which of course is just music to our ears.

According to the report from ICI, “demand for index funds remained strong in 2014, with investors adding $148 billion in net new cash flow to these funds.” The continued growth in assets for index based investment strategies over the last 7 years has been tremendous. Net asset flows into equity index funds and ETFs toppled $1 trillion while their actively managed counterparts have seen a net outflow of $659 billion over the same time period.

The growth has also begun to accelerate in recent years. While net new flows into index funds averaged $28 billion during the early 2000s, net new flows have averaged approximately $75 billion over the last 7 years and $107 billion over the last 3 years.

The large bulk of these new assets have been directed towards exchange-traded funds (ETFs), which have been praised by the industry as being a low-cost and more tax-efficient alternative to traditional index mutual funds. Our biggest concern with the tremendous growth in ETF assets is that these investment vehicles are not being properly used. While following an index-based strategy should always been seen through a long-term lens, the daily volume for some of the largest index-based ETFs is in the millions. For example, the largest index-based ETF, which happens to be the SPDR S&P 500 (TICKER: SPY) has an average daily volume of just over 145,000,000 shares per day as reported by ETF Database. In other words, this may be a cheaper and easier way to day trade and time the market versus committing to a long-term investment plan. We don’t know for certain, but it does seem like a lot of trading for a buy-and-hold vehicle.

We have made a tremendous commitment to educating the masses about a better and more reliable investment solution for investors through the use of index funds. The recent trends in fund assets geared towards index funds are a direct reflection of the failure of the actively managed mutual fund industry. But while the benefits of index funds are starting to gain traction, there is still more work to be done. It is not uncommon to find investors stumbling upon index funds based solely on past performance. Applying the same process investors usually go through in choosing the next best active fund, relying solely on past performance will more than likely leave an investor worse off. The best thing an investor can do is first find a strategy or philosophy that you can stick with through thick and thin. We have made the argument for why that strategy should be a passive one. Partnering with an unattached third-party like an IFA Wealth Advisor can also help keep an investor committed to the strategy that they have set out for themselves.

If you are interested in speaking to an IFA Wealth Advisor about your personal financial situation, please call 888-643-3133.