Cogent Research : Retail investors away from mutual funds

Investors are slowly moving away from mutual funds and are increasingly embracing ETFs in what appears to be a growing trend that is likely to continue in 2011, according to a study by Cambridge, Mass.-based business consultancy Cogent Research.

As of October of last year, 75 percent of retail investors owned mutual funds, a 3 percentage-point drop from a year earlier, and 19 percentage points below October 2006, Cogent said. Over the same four-year period, the proportion of investors reporting that they owned ETFs rose by more than 50 percent to 11 percent from 7 percent, Cogent said.

Total assets in U.S.-listed exchange-traded products crossed the $1 trillion mark in November of last year, almost 18 years since the first exchange-traded fund, the SPDR S&P 500 ETF (NYSEArca: SPY), was brought to market in January 1993. Total U.S. ETP assets have since grown to almost $1.024 trillion. That compared with $11.487 trillion in U.S. mutual fund assets as of the end of November, according to Investment Company Institute data.

"These numbers reflect a dramatic shift in preference among investors for both mutual funds and ETFs," Cogent Research Principal John Meunier said in a press release. "And while it's impossible to know exactly how things will play out, it's clear that a major realignment is underway."

"Traditional mutual fund providers are fighting tooth and nail for a shrinking piece of real estate, while established ETF providers face a different challenge; fending off a rush of new providers in a rapidly expanding marketplace," Meunier added.

Retail investors have not only been consistently using more and more ETFs instead of mutual funds as their investment vehicle of choice, but they have also been allocating more assets to these instruments, Meunier added in a telephone interview.

Since Cogent’s annual Investor Brandscape Report first came out in 2006, through this last report, there has been a “significant move away from mutual funds,” he said.

“We can no longer ignore that this shift is happening,” Meunier said. “Retail investors have embraced ETFs because of their simplicity, transparency and cost. The advisor-investor relationship has changed, and it’s harder to justify the value of paying for the cost of active management in a mutual fund for broad strategies like the S&P 500.”