From Patturaja Murugaboopathy

May 28 (Reuters) – Investments in US exchange traded funds (ETFs) have soared to record levels this year, driven by a rally in stocks and investors’ preference for passive index tracking funds over actively managed peers .

According to Refinitiv, U.S. ETFs saw record inflows of $ 324 billion in the first four months of this year, up 180% from the same period last year. At the same time, US mutual funds received an inflow of $ 318 billion, down 58%.

This increase in inflows is testament to the growing interest among investors in ETFs due to their lower fees and tax liabilities and better returns compared to active funds over the past few years.

Analysts said the Joe Biden administration’s proposals to increase the US withholding tax have also sparked interest in ETFs.

“Over the past six months, flows have continued to be robust as the increased private sector savings pile found its way into financial assets, which benefited ETFs,” said Komson Silapachai, vice president of Austin-based investment management firm Sage Advisory Services .

“The expected increase in capital gains tax later this year should result in a higher preference for ETFs over mutual funds for the highest tax brackets.”

Since most ETFs are passively managed, there are fewer buying and selling, resulting in lower capital gains and taxes.

In addition, ETF redemptions are made through a mechanism known as a “transfer in kind” which requires ETFs to deliver baskets of securities to authorized brokers instead of paying cash, which eliminates taxation.

According to Refinitiv, U.S. equity ETFs saw cumulative inflows of $ 149.6 billion in the first four months of this year, while debt ETFs returned $ 283.6 billion.

The Vanguard 500 Index Fund led this year’s inflows with net purchases of $ 20.7 billion, while the iShares Core S&P 500 ETF and Financial Select Sector SPDR Fund raised $ 11.8 billion and $ 9.6 billion, respectively .

The story goes on

Analysts said the higher inflows were also due to the availability of a variety of ETFs that focus on specific themes or sectors.

The rise in ETFs was triggered by an SEC rule in 2019 that removed some of the exemptions that made ETFs expensive and time-consuming to launch.

“The relaxation of the exemption requirements has allowed ETFs to be structured to cover narrower segments of the market like marijuana stocks, high conviction stocks, crypto-focused stocks, etc.,” said Warren Ward, founder of the financial planning firm. Warren Ward Associates in Houston.

“I suspect this is the main driver of the higher inflows,” he said.

“Why choose a single stock when you can use a small basket of it instead?”

(Reporting by Patturaja Murugaboopathy; Additional reporting by Gaurav Dogra Editing by Vidya Ranganathan and Louise Heavens)