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Investors are funneling more and more money into exchange-traded funds to brace against what is expected to be a difficult market in the coming months.
Concerns about both volatility and a sideways churn after a massive seven-month rally have steered investors away from direct stock plays and into ETFs so they can be nimble while still investing in broad sector indexes.
Unlike regular mutual funds, which are priced once a day after the market close, ETFs trade throughout the day just like stocks.
September saw the ETF industry surpass $700 billion in funds under management—a new high—as investors flocked to the vehicles and away from hedge funds and other risky instruments.
"Individual investors are buying more and more open-end funds and they're buying more and more ETFs," says Keith Springer, president of Capital Financial Advisor Services in Sacramento, Calif. "You have the appearance of diversification and professional management; you don't have to pick individual stocks. They're liquid and it's much cheaper."
Interestingly, it's not even the ETFs that hold individual stocks that are driving the surge.
Fixed-income funds, particularly taxable bonds, were the big gainers in the third quarter and throughout 2009. The group has seen an inflow of $26.7 billion this year, including $8.1 billion in the third-quarter alone, according to data from Morningstar.
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