Exchange-traded funds (ETFs) are seeing yet another step up in popularity as institutional investors seek out low-cost funds in favour of more expensive investment vehicles such as hedge funds.
Data from research firm ETFGI shows that ETFs now hold over $1 trillion more in assets under management compared with hedge funds as investors increasingly choose low-cost exposure to capital markets versus value-added propositions.
Globally, ETFs grew assets under management by $347.7bn over the first half of the year while hedge funds received just another $1.2bn in net inflows.
It means that ETFs had $4.17 trillion under management by the end of June compared with $3.10 trillion for hedge funds.
ETF´s first overtook hedge funds in assets under management two years ago and only seem to grow in popularity.
Ten years ago, ETFs had just $0.22 trillion in funds compared with $0.82 trillion for hedge funds.
Hedge funds are struggling to justify their much higher costs compared to ETFs.
The average annual cost for ETFs is just 0.27%, while hedge funds typically charge investors 2% in addition to a percentage of profits which can be as high as 20%.
Alongside the big ETF providers such as iShares, traditional asset managers are increasingly offering passive alternatives as investors clamour for low-cost propositions.
Driving the overall expansion of ETFs is the huge variety of passive exposure currently on offer.
ETFs mirroring the performance of the US large-cap S&P 500 index tend to be among the most popular passive funds in the world.
However, following a strong run for US equities, recently many investors have been using ETFs to gain protection against a possible correction.
In July, retail investors put $445m into ETFs mirroring the VIX, which in turn replicates the S&P 500´s volatility.