Mutual Funds

Associated Press

It was another banner year for ETFs.

Investors poured cash into U.S.-based stock exchange-traded funds at the fastest pace on record this year, according to research firm Lipper. As of Christmas Eve, U.S. stock ETFs have seen more than $143 billion in inflows in 2014, surpassing last year’s record of $137 billion. And the week marked another milestone as well: total assets in U.S. ETFs surpassed $2 trillion  for the first time ever.

The money was pouring into ETFs this year as U.S. stocks were hitting all-time highs, companies were debuting at the quickest clip since the dot-com bubble and deal volume was the heaviest since 2007.

ETFs trade like stocks, but hold a basked of assets like a mutual fund. The ETF market is only about one-tenth the size of the mutual fund industry, but is growing at a faster pace. U.S.-based stock mutual funds have also attracted money this year, but have only collected a little less than half of last year’s $194 billion.

Many mutual funds are actively managed, and typically charge higher fees than ETFs, which are mostly index-based. The slower pace of flows into mutual funds comes in a year when nearly 80% of a U.S. stock funds have underperformed their market benchmarks .

Among ETFs, the SPDR S&P 500 ETF has seen the heaviest inflows. The fund, which tracks the S&P500, has attracted nearly $25 billion so far in 2014. That is the greatest annual inflow any ETF has seen since ETF research firm ETF.com starting following the data in 2009, and it is nearly twice the amount it collected last year.

“We’ve seen a ton of movement into core U.S. markets,” said Dave Nadig, director of research at ETF.com. “Some of it may be market [performance] chasing.”

U.S. stocks are on pace for a third straight year of double-digit returns, outperforming global markets in 2014. An improving U.S. economy, low inflation, ultra-low borrowing costs and significant deal activity have all made the U.S. an attractive place to be this year, especially as growth slows abroad and Europe faces the threat of deflation.

In fact, just last week, investors piled into U.S.-based stock funds at a record clip as the Dow Jones Industrial Average surged to another historic high, passing the psychologically-important 18,000 level.

In addition to the SPDR S&P 500 ETF, other broad-based S&P 500 funds have attracted the most money this year. The Vanguard S&P 500 ETF has seen the second heaviest amount of inflows, collecting $10 billion. The iShares Core S&P 500 ETF ranks third, gathering $ 9 billion.

But not every ETF is growing in popularity. The iShares MSCI Emerging Markets ETF. which is especially volatile, and the SPDR Gold ETF are among funds witnessing the biggest outflows for a second year running. The iShares emerging markets fund has seen redemptions of $5 billion in 2014, while SPDRs gold ETF has lost $3 billion.

These outflows may not come as surprises to investors. Gold has depreciated as the U.S. Dollar Index has risen to an eight-year high. Meanwhile, emerging markets like Russia and Greece are down worse than 20 percent this year.

Emerging markets, which rely heavily on foreign investment, have suffered as the Federal Reserve has ended its massive bond-buying program and warned a rise in short-term interest rates is on the horizon.