While still trailing behind the mutual fund’s large presence in the 401(k) space, exchange traded funds are making inroads as companies like Apple (NasdaqGS: AAPL) adopt the more efficient investment vehicle.
Apple employees have the majority of their 401(k) assets in ETFs, according to a Bloomberg report. Many of the employees are already acquainted with ETF products as they include them in their own investment accounts, so it is not too farfetched to include the investments in their retirement plans, writes Ron Delegge for InvestorPlace.
Currently, ETFs account for less than 1% of the $1.2 trillion 401(k) market, with companies like ShareBuilder, Schwab, TD Ameritrade, Invest’n’Retire and ExperPlan providing ETF options in their retirement plan. [ETFs Make Strides in 401(k) Plans]
Investors, such as those at Apple, enjoy the ETF product’s low costs. For instance, the cheapest broad-based equity ETF has an expense ratio of 0.05%, whereas most mutual funds have expense ratios over 1%. Consequently, over the long run, ETFs will significantly diminish costs and provide better returns to the investor.
The majority of ETFs are passively linked to major market indices, which have historically outperformed most money managers.
“Indices have outperformed a majority of active managers in nearly all major domestic and international equity categories,” according to a Standard & Poor’s mid-2011 survey. “In addition, five-year asset-weighted averages suggest that active managers have fallen behind benchmarks in 11 out of 18 domestic fund categories.”
Furthermore, with ETFs, anyone can monitor the funds’ holdings and market exposure on a daily basis, whereas mutual funds typically disclose holdings quarterly or semi-annually. ETFs also allow investors to access a greater variety of asset classes, like commodities or international equities.
For more information on ETFs in 401(k)s, visit our 401(k) category.
Max Chen contributed to this article.