3 Winners From the Flash Crash

Before writing the flash crash off as an unmitigated disaster, consider how it affected these three types of investments.

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During this month’s flash crash, which saw the Dow briefly plummet by roughly 1,000 points, most asset classes took sharp hits. And in the ensuing panic, the stock market seemed dangerously close to flying off its hinges. But before writing off the entire event as an unmitigated disaster, consider how the market’s tailspin affected these three types of investments:

[See U.S. News's list of the Best Mutual Funds for 2010, and use our Mutual Fund Score to find the best investments for you.]

Money market funds. By almost all measures, it’s been a rough year for money market funds. As interest rates remain artificially depressed, yields on these funds have been hovering near zero for months. In this climate, investors have steadily marched out of money market funds and into bond funds. In March, total assets in money market funds dipped below $3 trillion for the time since 2007. But for the week starting May 6, the day of the flash crash, money market funds saw net inflows, according to the Investment Company Institute. That marks only the second week this year that this has happened.

[See Understanding the Ongoing Money Market Crisis.]

All told, money market funds took in $24.2 billion that week as investors flocked to safety wherever they could find it. Still, experts expect this to be a temporary phenomenon, particularly since investors often use money market funds as a parking place for cash they just pulled out of the stock market. In the case of the flash crash, investors likely used the funds as a way to wait out the temporary surge in volatility.

Given how little investors can expect to make in money market funds, the panic-driven dollars are likely to flow back out soon--if they haven’t already. “The [yields] aren’t any better than they were before,” says Connie Bugbee, the managing editor of the money market analysis firm iMoneyNet.

The mutual fund model. Exchange-traded funds, which have long been a thorn in the side of mutual fund purists, have steadily been gaining traction. By the end of 2009, ETFs across the globe had more than $1 trillion in them, according to BlackRock. While this still pales in comparison to mutual funds, which in the United States alone comprise an $11 trillion industry, it goes without saying that ETFs are continuing to uproot traditional funds in investors’ portfolios.

But during the flash crash, ETFs’ biggest blessing--their ability to trade throughout the day--turned into a curse as the funds fell victim to the nauseating market swings. Take, for instance, the iShares Russell 1000 Growth Index Fund. Its opening share price on May 6 was $51.42, but it plummeted to just 1 cent before surging back to $50.11. After the dust cleared, approximately 68 percent of the trades that were canceled as a result of massive price fluctuations involved ETFs.

Since mutual funds only trade at the close of business each day, they were able to escape much of the madness. Paul Justice, an ETF analyst for Morningstar, concedes that ETFs have gotten some bad press in the aftermath of the flash crash. Still, he points out that despite their performance earlier this month, ETFs have traditionally held up “extremely well” during market turmoil.

Gold. The modern-day gold rush has grabbed quite a few headlines recently. Notably, the popular precious metal eclipsed the $1,200-per-ounce mark on May 6. Since then, it has climbed even higher and has at times brushed up against $1,240 per ounce. Gold’s heated rally is hardly surprising. Long known as the panicked investor’s best friend, gold soars in value when investors are worried. And when the flash crash shook traders’ faith in the market, they took refuge by piling into gold.