Why Investors Are Dumping Stock Funds for ETFs

Those billions flying out of mutual funds this year are finding a home in exchange-traded funds, where they’re riding a rally and fueling a trend that market pros say is here to stay.

ETFs have gathered $8.3 billion in new funds so far in 2012, while their actively managed cousins have seen nearly identical outflows of $7.9 billion.

Though one of the main investing themes this year is a clear rotation away from the things that worked in 2011 and towards the things that didn’t work, the trend toward index funds has continued unabated, propelled especially by the market’s mostly straight-line path higher.

“This is really about the clients being aware of cost efficiencies,” says Julie Casserly, president of JMC Wealth Management in Chicago. “They average investor is not going to like ETFs when the markets tank, and they’re going to think they’re the best thing since sliced bread when the market’s going up.”

Tuesday’s stock market decline notwithstanding, the market rally that began in October has only helped fuel the ETF trade. The 1,415 U.S.-based funds now boast $1.18 trillion in assets, up more than 11 percent just since January, according to XTF Rating Service.

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