Salient to Investors:
The value of transactions in S&P 500 Index ETFs is about to exceed the turnover for all of the index stocks for the first time.
Bears claim the increase in ETFs shows investors are giving up on picking stocks; bulls claim it shows that individuals and institutions still want to own equities but are fed up with paying fees to managers.
Mike Lenhoff at Brewin Dolphin Securities said ETFs allow investors an immediate exposure to the market without having to identify the right stocks.
Blackrock says North American equity exchange-traded products have attracted $29.3 billion this year versus total inflows of $103 billion in the last three years. EPFR Global say U.S. funds that invest in American shares have had net outflows of $18 billion in 2012 versus $257 billion outflows from 2008 to 2011.
Only 13 percent of actively managed funds were beating their benchmark index by at least 2 1/2 percentage points this year as of July 23, the lowest percentage since at least the mid-1990s.
Morningstar says fees of equity funds in the U.S. averaged 1.44 percent of assets annually versus 0.5 percent for ETFs.
Guy Fraser-Sampson at Cass Business School said there’s been a big shift, with a lot of large investors moving away from active investment to passive on growing recognition it is very difficult for active equity investors to consistently outperform – many long-only managers do not justify their fees.
Christian Mueller-Glissmann at Goldman Sachs said investors are giving up trying to pick individual stocks and instead trying market timing.
Bloomberg say the S&P 500 has moved 1.15 percent a day since the collapse of Lehman Brothers in September 2008 versus an 80-year average of 0.75 percent before then.
Christos Costandinides at Deutsche Bank said high volume in the S&P 500 funds is more representative of day trades than long-term ownership.
Robert Boroujerdi at Goldman Sachs Stock said stock prices can be influenced by the trading of ETFs.
NYU Professor Jeffrey Wurgler said stock prices are increasingly a function not just of fundamentals but also of the happenstance of index membership.
Joel Dickson at Vanguard said ETFs provide diversification and risk exposure without the additional volatility of the securities.