ETF Assets Set to Overtake Hedge Funds This Year

ETFs at $3 trillion means they’ll eclipse hedge funds

Traders on the floor of the New York Stock Exchange.

Traders on the floor of the New York Stock Exchange.

Photographer: Richard Drew/AP Photo

They’re cheap, easy to use, and they’re winning over more investors than ever.

Now exchange-traded funds -- investment tools that seek to replicate the performance of a portfolio of securities -- are growing at such a clip that their assets are poised to overtake those of hedge funds.

It’s no secret hedge funds have had a rough couple of years. Without the returns to make up for high taxes and fees, more investors are turning to the ever-growing range of ETF products on offer. ETFs have lower fees than mutual funds, lower taxes than index funds and are easier to buy or sell quickly than either. And underpinning gains is loose central-bank policy that has been fueling a general movement toward passive investing.

Bloomberg charted data from Markit for ETF assets and figures published by Hedge Fund Research (HFR) for hedge-fund assets. We then extrapolated the growth rates of both to show that ETFs are set to overtake hedge funds in the coming months.

“The average asset manager isn’t beating the indexes, so people are thinking, I might as well just buy the index,” said Eric Lichtenstein, senior managing director for Cantor Fitzgerald’s ETF business. “You’re seeing ETFs just explode.”

Two ETFs are leading the pack this year: the WisdomTree Europe Hedged Equity Fund and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF. Their assets have surged more than 600-fold since 2012, thanks to U.S. investors rushing to shield themselves from currency swings, according to Markit.

“Low taxes, transparency -- those are resonating with insurance and pension funds and all types of asset managers,” Lichtenstein said. “It’s now gotten to a point where traditional money managers are now having these conversations on a daily basis. It’s hard to ignore almost $3 trillion of assets.”

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