Why ETF Assets are Gaining on Mutual Funds

April 9th at 8:00am by Tom Lydon

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.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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