Are Stock Mutual Funds Dead?

Although the U.S. stock market put up a solid performance in 2009 -- propelled by a massive rally off its March low -- apparently, investors aren't investing in mutual funds. According to research from Goldman Sachs (NYSE: GS  ) , there was no net inflow into U.S. equity mutual funds in 2009 -- however, individuals did purchase $225 billion worth of stocks directly (including through ETFs) through the month of September.

Something new and shiny
After the drubbing investors suffered in 2008, some repudiation by investors of mutual funds is probably normal; in a bear market, investors' attention is more focused on their results and whether professional money managers are providing them with any value. But there may be another phenomenon at work. From virtually nothing at the exit of the previous bear market (2000-2002), assets in stock exchange-traded funds (ETFs) now equate to 13% of stock mutual fund assets.

A real threat
While any report of the death of stock mutual funds is an exaggeration; there is no question that ETFs such as the industry heavyweight SPDR S&P 500 (NYSE: SPY  ) , present a real competitive threat to traditional mutual funds. The best ETFs wrap index funds in a low-cost vehicle that is as convenient to invest in as a stock, which raises the level of competition in the overall industry and puts pressure on mutual fund managers to prove they offer value for money.

Beat 'em or join 'em
For money managers such as Legg Mason (NYSE: LM  ) it may be a case of beat 'em or join 'em (or "beat 'em and join 'em"); BlackRock (NYSE: BLK  ) and Charles Schwab (Nasdaq: SCHW  ) have already chosen to join 'em. Last year, BlackRock purchased the largest ETF platform, iShares, from Barclays (NYSE: BCS  ) .

Here are the 3 reasons you're being to set up to fail when you invest in mutual funds.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 20, 2010, at 1:31 PM, langco1 wrote:

    with the US now in its second year of a depression a few of the bankruptcys for 2010...GM ,chrysler,sirius,hertz,moodys,rite aid,etrade,aol and aig

  • Report this Comment On January 20, 2010, at 1:54 PM, JibJabs wrote:

    "While any report of the death of stock mutual funds is an exaggeration"

    Title of the article:

    Are Stock Mutual Funds Dead?

    That is a problem. How about a title that conveys more of your meaning? At least don't intentionally mislead and exaggerate the title like "The National Enquirer." That would be nice.

  • Report this Comment On January 20, 2010, at 2:02 PM, henryking54 wrote:

    <<assets in stock exchange-traded funds (ETFs) now equate to 13% of stock mutual fund assets.>>

    Why are you comparing total ETF assets (both stocks and fixed income) to stock-only mutual funds? Comparing apples to oranges just to print a high number (13%) is sensationalistic journalism at its worst.

    The real percentage (apples to apples) is $1 trillion ETF assets to $19 trillion mutual fund assets, or 5.2%.

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