Vanguard took in record $24.3B in mutual fund flows last month

The Vanguard Group Inc., the biggest U.S. mutual fund firm, attracted a record $24.3 billion from clients last month, mostly into stocks, as signs of an improving U.S. economy prompted investors to return to equities. January's deposits were over 40% higher than the previous monthly record of $16.8 billion in January 2012, John Woerth, a spokesman for Vanguard, wrote in an e-mail. About $20 billion of last month's total went into stock-oriented mutual funds and exchange-traded products. Fund investors stepped up their investments in equities as signs of improvement in the U.S. economy sent the S&P 500 up 5% last month and pushed the Dow Jones Industrial Average to 14,000 for the one-week period ended Feb. 1. It was the first time since 2007 that the Dow hit that mark. Domestic stock funds, which have experienced redemptions for the past six calendar years, won $16.1 billion in the first three weeks of January, according to the Investment Company Institute. “People may have looked at the market's performance and said, "Gee, I am missing out on an opportunity,'” said Michael Rawson, a fund analyst for Morningstar Inc. “I am not surprised the flows into stocks are strong.” U.S. mutual funds collected $64.8 billion in net deposits in the first three weeks of January, on track for the biggest month on record for deposits, according to the ICI. The previous record for a full month was $52.6 billion in May 2009, ICI data show. Equity mutual funds gathered $29.9 billion in the three-week period, more than for any full month since 2006. ETFs gathered $31 billion last month, about $29 billion of which went into equity-oriented products, according to research firm Index-Universe LLC. Vanguard, which manages $2.07 trillion in U.S. fund assets, is known for its low-cost funds, which mimic the performance of indexes. Vanguard's equity mutual funds charge 11 cents for every $100 invested, compared with 78 cents for the industry as a whole, according to data from Lipper Inc. With $246 billion in exchange-traded funds, Vanguard was the third-largest provider of U.S. ETFs as of Dec. 31, behind BlackRock Inc. and State Street Corp., according to data from State Street.

INDEX SWITCH

In a bid to cut ETF costs, Vanguard said in October it would adopt benchmarks from FTSE Group for six international stock index funds and benchmarks developed by the University of Chicago's Center for Research in Security Prices for 16 U.S. equity and balanced funds. The decision didn't hurt the popularity of the firm's ETFs, Mr. Woerth said. Vanguard attracted $10.2 billion in ETF deposits last month, and new money has increased in almost all the company's ETFs since the October announcement, he said. One ETF that has been affected adversely by the switch is the firm's largest, the $62 billion Vanguard FTSE Emerging Markets ETF. Unlike the competing MSCI Emerging Markets Index, the FTSE product doesn't track South Korean stocks. Since Oct. 1, rival BlackRock's iShares MSCI Emerging Markets Index, which includes Korea, won more than $12 billion in deposits, compared with less than $500 million for the Vanguard offering, according to data from IndexUniverse. In the first nine months of last year, the Vanguard ETF took in about seven times more money than the BlackRock fund.