Credit: Shutterstock photoLow-cost portfolios, almost all of which are passively run, had the biggest net inflow among all stock mutual funds in the 12 months ended Feb. 28. The big draw is low costs and their ability to outperform most of their actively managed counterparts, but many investors in them may not be aware that they are getting exposure to the stock market's hottest stocks.
Take $541.3 billion Vanguard Total Stock Market Index ( VTSMX ). With $47 billion of net new money in those 12 months, it drew the most net new money of any mutual fund, according to Morningstar Inc. Its top three holdings were Apple ( AAPL ), Alphabet ( GOOGL ) and Microsoft ( MSFT ) as of Feb. 28. Apple shares soared 42% in value over those 12 months. Alphabet jumped 18% in that year. Microsoft climbed 26%. Weightings of those holdings range from about 3% of assets to 1.4%.
The fund advance 26.14% in that span. Did shareholders sacrifice anything in terms of performance because it's an index fund? Hardly. The fund actually outperformed the S&P 500's 24.98% over those 12 months.
Among the five stock mutual funds with the most inflow, $68 billion Vanguard Emerging Markets Stock Index ( VEIEX ) had the top performance in those 12 months. The fund gained 29.75%.
The fund held 4,248 stocks as of Feb. 28. Its top three holdings were Taiwan Semiconductor Manufacturing (TSM), Tencent Holdings (TCEHY) and China Construction Bank . Weightings were about 2% and 3% of assets.
Taiwan Semi gained 34% in the 12 months ended Feb. 28. One big plus for the firm is that it has a deal to make 100 million A11 microchips to be used in the upcoming Apple iPhone 8 this year.
Tencent, China's most valuable company, is up 46%. The company owns China's largest social network, WeChat. Last week, Tencent disclosed that it had bought a 5% stake in electric-vehicle maker Tesla (TSLA). The investment comes as Tesla chief Elon Musk is under pressure to deliver his $35,000 Model 3 sedan on time later this year and at a pace he forecast. Musk described Tencent as an advisor, hinting that the new relationship may be strategic, not just financial.
China Construction Bank's Hong Kong-listed shares rose 40% in the year. Chinese banks have soared in the past year. Many investors expect China's modest monetary tightening to help boost profits. And many investors see the banks as attractively valued. Yet other investors remain concerned about banks' bad debt levels and a perception that state-owned lenders put national strategic interests above those of shareholders.
Inflow
Only one of the 10 stock mutual funds with the largest net inflows in the 12 months ended Feb. 28 is not an index fund. That's the $106.7 billion American Funds American Balanced Fund (ABALX), whose $9 billion of inflow ranked No. 7 among stock funds, according to Morningstar.
American Balanced is a stocks-plus-bonds fund that aims for stocks to account for 50% to 70% of its portfolio.
A similar pattern exists among bond funds, whose biggest drawers of net inflow are also index funds.
Increasingly, many investors have decided that it is too hard for mutual funds to consistently beat market benchmarks , Tom Roseen, head of research services for Lipper, recently told IBD. Index funds enable shareholders to come close in performance. The lower an index fund's costs, the smaller the gap between the fund's performance and the index it tracks. "Active managers have to outperform their index and their expense ratios, putting a bigger hurdle in front of them to jump," Roseen said.
Vanguard, with its reputation for low-cost index funds, dominated the ranks of mutual funds pulling in the biggest net inflow. Eight of the biggest-inflow stock mutual funds were Vanguard's. Six of the top inflow bond funds were Vanguard's.
Inflow to index funds and outflow from actively managed funds were the key to giant asset manager BlackRock's recent decision to merge a number of its actively managed funds into robo-funds, computer-driven portfolios. In addition, some actively run BlackRock (BLK) funds will be closed or given new investment mandates. At least five fund managers will be shown the door.
BlackRock's iShares arm attracted nearly $108 billion in net new money to its low-cost ETFs in calendar 2016. But BlackRock itself bled a net $8.414 billion, basically, from its mutual funds.
RELATED:
Guess Which Stock Mutual Funds Drew The Most Money In '16
Vanguard Drew The Lion's Share Of 2016's Mutual Fund Net Inflow
Vanguard Net Fund Inflow Dwarfed Its Peers' In 2016
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
