Skip to main content
Publish date:

Assets Crest Record $10 Trillion Mark

Reports of the industry's death have been exaggerated, though ETFs are still a threat.

Exchange-traded funds may be grabbing most of the headlines these days, but mutual funds are still pulling in the big bucks.

The U.S. mutual fund industry crossed the $10 trillion threshold for the first time in October, when the combined assets of the nation's open-end funds rose by $286.6 billion, or 2.9%, to $10.013 trillion, according to the Investment Company Institute, a Washington, D.C., trade group.

The data include assets in stock funds, hybrid funds, long-term bond funds and money market funds.

By comparison, ETF assets rose 9.4% to $383.3 billion in October from $350.3 billion in September, according to ICI. (Mutual funds themselves are big investors in ETFs, but the ICI strips out these holdings to avoid double-counting assets.)

The mutual fund industry has come a long way since the beginning of the decade, when the combination of the dot-com bust and a trading scandal prompted some investors to switch to ETFs. In 2002, mutual fund assets fell for the first time in 19 years to $6.3 billion from $6.9 billion in 2001. (ICI spokesman Edward Giltenan says stock-market declines were largely responsible for the drop, as investors added $120 billion more to mutual funds than they withdrew that year.)

ETFs, which are baskets of stocks or other securities that trade throughout the day on an exchange, certainly have a lot of advantages, including lower management fees and tax efficiency. They're also largely immune to market timing and late-trading abuses.

However, the mutual fund industry has demonstrated its staying power.

Clearly, the recent strength of the stock market has been a driving factor in boosting fund assets. The average stock fund tracked by Ratings returned an annualized 12.71% over the three years ended Oct. 31.

Todd Trubey, mutual fund analyst at Morningstar, notes that only $566 billion of the mutual fund industry's $4 trillion in growth since 2002 has come from new money.

"A lot of

the growth is appreciation," he says. "The other factor is when there's a stock market rally, people tend to invest in stocks and mutual funds."

TheStreet Recommends

Mutual funds are also benefiting from the fact that more companies are forcing employees to put aside money for their own retirement. Mutual funds hold half of the $2.4 trillion in assets invested in 401(k) plans, according to the ICI.

While investors have pulled money out of individual firms implicated in the trading scandal, ICI spokesman Giltenan says most of it was probably shifted to other fund families. "People who betrayed investors' trust paid the ultimate price, but there was not a crisis of confidence."

Morningstar's Trubey adds that the trading scandal has resulted in some positive change. "First of all, you started seeing

more redemption fees," he says, noting that this discourages the rapid-fire trading that can harm long-term shareholders.

"Second, compliance was beefed up, especially at the firms that participated

in the abuses. We've also gotten some movement on the regulatory front. But one of the key things is that the

scandal got investors to think about the fund firms they could really trust."

Some people are skeptical about the mutual fund industry's staying power, however, given the rise of ETFs.

Kevin Baker, senior financial analyst at Ratings, notes that all of the ETFs currently offered in the U.S. are passive investment vehicles that track indices. But he believes that an actively managed ETF product would have even broader appeal.

"Several firms have applied to create actively managed ETFs," he says. "Once the cork is popped, there will be no chance to get the champagne back in the bottle. I predict it will be all downhill for mutual fund assets, since ETFs are a superior investment vehicle."

Allison Bisbey Colter joined in 2006 from the New York office of Dow Jones Newswires, where she spent the previous seven years covering consumer finance, mutual funds and hedge funds. Prior to that, she worked in Europe for Dow Jones covering transportation from London and Italian capital markets from Milan. She is a graduate of Wesleyan University, where she received a BA in government.