Why Index Funds are Falling Apart

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The hedge fund industry is trimming down on its exchange-traded fund and diversified holdings.  After peaking at 40% of all volume in October at the pinnacle of the crisis, exchange-traded fund volume has since descended to 35% of all stock market volume.  The change is coming; investors are ready to start picking stocks again instead of picking portfolios.

Index Funds Lack the Shine

Index funds lack what attracts investors.  Before exchange-traded funds and other Wall Street derivative investments, index funds had a class of their own on Wall Street.  Low fees and average returns were what kept investors going back, but there are plenty of funds with the same standards.  There are now some 700 exchange-traded funds, all with fees lower than .5%.

Exchange-Traded Funds Taking Over

With such a wide variety of ETFs, investors have little reason to use any other investment vehicle.  They’re cheap, practically cover every sector and investment type, and offer exposure to a vast number of commodities that few investors ordinarily can access.  The most popular funds this year are those in gold and other precious metals.  Before exchange-traded funds, most investors would have very little interest in buying gold; it’s hard to buy at coin shops and even more difficult to wrestle with commodity brokerage account paperwork.

Managed ETFs

Managed exchange-traded funds are the hottest product on Wall Street.  Why wouldn’t they be?  Managed ETFs offer the professional management of standard mutual funds while charging fees at a fifth of the price of most mutual funds.  Additionally, all exchange-traded funds must report their holdings to shareholders once a day.  Investors who buy ETFs know EXACTLY what they’re buying, what the fund holds and how much.  While the mutual fund industry may write this off as a loss, it’s an enormous win for the investing class that desires more accountability and transparency with their money.

Investors Demanding More Control

There exists a gradual shift in the way investors are monitoring their portfolios.   Many investors are opting for self-directed IRAs and 401ks that allow greater consumer choice in both mutual fund and exchange-traded fund offerings.  The trend doesn’t stop there; retail brokers are extending more accounts to small investors who want to trade their own portfolios at home.  The shift in investor demand for investments that offer control won’t stop any time soon, especially as investors have been burned by the fraud and poorly performing portfolios plaguing Wall Street recently.

How Many Indices Are There?

If you said three big indices, you’re right.  The Dow Jones Industrial Average, S&P500 and the NASDAQ Composite round out the most popular indices.  However, in reality, there are several thousand indices.   Investment companies often have to create their own index to launch a new mutual fund or exchange-traded fund.  Most ETFs now that track an index track a proprietary index.  The investing world is soon to shift. with more and more private portfolios and indices making their way to the market, where the public will decide which ones stay and which ones go.

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