Saturday, February 27, 2016

Many mutual funds now hold ETFs

Picking stocks has become so hard that some stock pickers have given up pretending to try.

Pry open the hood of a mutual fund, and you might be startled by what you find. In the past, you would have seen roughly 100 stocks, each painstakingly selected by a portfolio manager passionate about beating the market. Today, you increasingly are likely to find a few handfuls of exchange-traded funds, those autopilot portfolios that seek to mimic the market rather than beat it. ...

According to Morningstar, the investment research firm, 18% of stock, bond or “allocation” funds—which include the target-date funds popular in 401(k) plans and own a blend of assets—hold ETFs, up from 13% in 2010. The funds that own ETFs have an average of 20% of their assets in them.

Allocation funds that hold more than half their assets in ETFs charge an average of 0.6% in annual management fees, not much less than the 0.7% average for active U.S. stock funds, Morningstar says. That means some allocation managers are charging almost as much to buy a few ETFs as active stock pickers researching hundreds of individual securities.

USAA Asset Management Co., which runs about $66 billion in mutual funds, holds at least $4 billion of ETFs, says Lance Humphrey, a portfolio manager at the San Antonio-based firm.

As of 2013, USAA Global Managed Volatility Fund, which seeks to capture the returns of stocks around the world but with less risk during downturns, owned more than 600 stocks and bonds. Now, the nearly $200 million portfolio has all its money invested in 19 ETFs. ...

Global Managed Volatility is run “tactically,” shifting its holdings based on shorter-term considerations. Its management fees—0.6%—haven’t changed...