The $1.4 trillion U.S. exchange traded fund industry has seen growth surge since 2007 as a growing number of professional and individual investors have realized the various advantages. Some advisors now view the traditional mutual fund as a dinosaur in a new investing landscape.
“I don’t see any justification for traditional mutual funds” to go on, said David Kotok, who manages $2.2 billion at Cumberland Advisors in Sarasota, Fla. He has been using ETFs exclusively to build client portfolios since 2000. [Developed Market Equity Demand Fuels Record Quarterly ETF Inflows]
The advantages that ETFs have over mutual funds, and other investment options, has caught investors interest. ETFs have given investors a “menu of options” for portfolio diversification, reports Tom Petruno for the LA Times. ETFs also give investors a “sense of control” over other investment options, one advisor said.
The strongest advantage that ETFs have over mutual funds is the low cost. Some ETFs cost about 0.04% versus the 1% or 2% common with mutual funds. The fact that most ETFs are passive and don’t have a manager helps to keep costs down. ETFs do charge commission fees on top of expense ratios, however, some brokerage firms now offer free trades for in-house accounts. On average, trades cost $10 or less at many brokerage houses. [Fee Battle: ETFs vs. Mutual Funds]
Broad-based ETFs have flourished and most of the sentiment that has supported them has trickled into “index mutual funds”. Investors like the simplicity of buying a large, diversified segment of the stock market and holding it. The long-term, buy-and-hold state of mind also helps keep costs to a minimum, while the investor gets the advantage of diversification.
The idea of beating the market has become less of a goal over time after the market crash of 2008, which has led to less interest in actively managed mutual funds.
“There has been a huge shift in the financial community in the last decade away from commissions and to fee-based advice,” Joel Dickson of Vanguard said.
Now, about 60% of assets managed by advisors are fee-based, Dickson said. Without favored commission-paying products to sell, advisors naturally gravitate toward low-cost investment tools. “And those low-cost options are predominantly on the ETF side,” Dickson said. [iShares: Comparing Mutual Funds and ETFs]
However, traditional U.S. mutual funds still hold more than seven times the assets that ETFs have, a sign of the growth potential that lies ahead.
Tisha Guerrero contributed to this article.