Investors are jumping out of mutual funds managed by professional stock pickers and shifting massive amounts of money into lower-cost funds that echo the broader market.
Through November, investors pulled $119.3 billion from so-called actively managed U.S. stock funds in 2012, the biggest yearly outflow since 2008, according to the latest data from research firm Morningstar Inc.
At the same time, they poured $30.4 billion into U.S. stock exchange-traded funds. When combined with bond ETFs, total inflows to such funds were $154 billion, the largest since 2008.
The move shows growing investor distaste for volatility, as the dot-com crash in the early 2000s, the financial crisis in 2008 and recent botched episodes such as last May?s Facebook Inc. initial public offering have shaken investor confidence.
It also reflects the fact that many money managers of stock funds, which charge fees but also dangle the prospect of higher returns, have underperformed the benchmark stock indexes. As a result, more investors are choosing simply to invest in funds tracking the indexes, which carry lower fees and are perceived as having less risk.
Mutual-fund experts and fund-firm executives said the trend likely accelerated in December. Inflows for ETFs in the U.S. totaled $28.1 billion for the month, up from $20.6 billion in November, according to Deborah Fuhr, a partner at London-based ETFGI LLP.
The ETF researcher calculates that ETF inflows set a record of $187 billion for all 2012, eclipsing the previous mark of $176 billion the firm recorded in 2008.
?ETFs have really won people over,? Ms. Fuhr said.
Erik Oliver, a 40-year-old patent attorney in Redwood City, Calif., is one. He recently pulled $40,000 out of actively managed funds and moved it into less-expensive index funds run by Vanguard Group Inc.
His decision turned on cost. ?I thought about who was more likely to have lower fees 10 years down the road,? Mr. Oliver said.
The mission of stock pickers in a managed mutual fund is to outperform the overall market by actively trading individual stocks or bonds, with fund managers receiving higher fees for their effort. In an ETF, managers balance the share makeup of the fund so it accurately reflects the performance of its underlying index, charging lower fees.
U.S. mutual funds that invested in large growth stocks in 2012 returned an average of 15.3%, while the similar ETFs tracking the index returned 16.4%, according to Morningstar.
The firm says that when investors have put money in stock funds, they have chosen low-cost index funds and ETFs. Some index ETFs cost less than 0.1% of assets a year, while many actively managed stock funds charge 1% a year or more.
While the trend has put increasing pressure lately on stock pickers, it is shifting the fortunes of some of the biggest players in the $14 trillion mutual-fund industry.
Fidelity Investments and American Funds, among the largest in the category, saw redemptions or weak investor interest compared with competitors, according to an analysis of mutual-fund flows done for The Wall Street Journal by research firm Strategic Insight, a unit of New York-based Asset International.
American Funds saw net outflows of $55 billion through Nov. 30, the latest data available, while Fidelity, the second-largest mutual-fund company, brought in just $1 billion, far behind its largest rivals.
?There has been an overriding theme of anxiety among investors about the stock market,? said Avi Nachmany, director of research at Strategic Insight, a mutual-fund research and consulting firm. ?Those companies whose total focus on stocks are suffering.?
A spokesman for American Funds said the firm has no plans to change its strategy.
?We?re not considering offering index funds and we?re not considering offering ETFs in the near future,? the spokesman said.
A Fidelity spokesman said, ?Fidelity?s focus has been to offer our clients a wide variety of financial products and services to help them meet their financial goals.?
At the other end of the spectrum, firms such as Vanguard, BlackRock Inc.?and Pacific Investment Management Co., a unit of Allianz SE, all have seen strong investor inflows.
Vanguard, the world?s largest provider of index mutual funds, pulled in a net $141 billion last year through December, according to the company.
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