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Creeping In On The Mutual Fund In 401K Investments - The ETF

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Some interesting data out of BrightScope today shows that the defined contribution plan market (that is, funds that are bought to fill 401-K plans or other employer-offered retirement funds), currently held primarily by mutual funds, may finally be opening itself to another player – The ETF.

BrightScope’s data shows that exchange-traded funds are appearing in slightly higher distribution levels among U.S. 401K funds this year. Though the numbers are nowhere near shattering the hold that mutual funds have on pension fund investments, it may indicate that employers are becoming more familiar, and therefore more comfortable with ETFs as choices for the long-term growth of an investment. BrightScope's CEO Mike Alfred said:

ETFs are off to a slow start in terms of their distribution in 401k plans but we expect their prevalence to grow dramatically in the future as plan sponsors begin to understand the benefits of including them on plan menus. The risks of ETFs have been wildly exaggerated. In many ways, ETFs are actually less risky than other instruments if the focus is on long-term returns.

Of the 6,800 401K plans in BrightScope’s system with a 2007 and a 2009 filing, which is the most recent comparative data available, the distribution of ETFs rose 42%, to $1.69 billion in 2009 from $1.19 billion in 2007.

According to BlackRock, which operates the ETF investment service iShares, at the end of April this year the global ETF industry had 2,670 ETFs with 6,021 listings and assets of $1,469.8 billion, compared with 4,354 listings and assets of $1,113.1 billion during the same period a year ago.

A study performed by Greenwich Associated and cited by BlackRock last month showed that institutional investors are reporting using ETFs more often for “transition management, cash equitization, rebalancing and liquidity management” this year. These uses suggest that the higher-yielding behavior of ETFs is working out well for institutions’ cash piles.

"Liquidity has become a governance issue,” BlackRock wrote on May 23. “The lessons of the global financial crisis of 2007-08 were hard ones. Institutional investors are applying their acquired knowledge from that period to their search for effective liquidity solutions. ETFs can be an effective tool for them."

For our information, BrightScope says the Top 10 ETFs by total distribution are (Note: The list has been updated to reflect an error in reporting the research):

1. Vanguard Total Bond Market (BND)

2. iShares Russell 1000 Growth Index (IWF)

3. Vanguard Small Cap Growth (VBK)

4. iShares Russell 2000 Index (IWM)

5. iShares Russell 1000 Value Index (IWD)

6. iShares Russell Midcap Value Index (IWS)

7. Vanguard Small Cap (VB)

8. iShares MSCI Emerging Markets Index (EEM)

9. Vanguard Growth (VUG)

10. iShares MSCI EAFE Index (EFA)