Trader Talk

Investors place heavy bets on European recovery

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Morningstar has just released its monthly report on fund flows (the movement of money into and out of mutual funds and ETFs) and we are seeing the continuation of two trends that have been gathering steam all year:

1)Outflows from U.S. funds to international funds;

2) Outflows from active investment into passive investments

These outflows from U.S. funds to international funds have been particularly strong. Morningstar said "Outflows from U.S. equity funds for only the first seven months of 2015 exceeded any previous annual outflows since 1993."

Wow. Pretty strong language.

But it's not surprising. The U.S. stock market is up only 1% this year, while the Vanguard Europe ETF is up almost 5%. The WisdomTree Europe Hedged ETF, which removes the effect of the strong dollar, has had huge inflows this year and is up 12%.

As Morningstar and everyone else knows, "flow follows performance," that is, investors put money into winners. They chase performance.

On the second trend, we all know that actively managed funds have been losing money to passively managed funds, and the trend is accelerating. That is, those that charge relatively high fees for "active" management (mostly mutual funds) are losing business to passive investments (like ETFs) that are generally index-based and charge lower fees.

Even firms that are continuing to stick with a heavy investment in active management are looking to reduce fees to keep investors. Fidelity, for example, has been setting up new investment structures called Collective Investment Trusts (CITs) that allows them to provide lower cost funds, though these are technically still actively managed.