As investors become better educated and informed, they are shunning actively managed mutual funds and moving toward other investments, such as exchange traded funds (ETFs).
Researchers from the Boston Consulting Group found that actively managed funds generated $147 billion in 2007 and could generate as little as $108 billion, or as much as $162 billion in 2012, reports the Boston Business Journal. The losses could add up to $39 billion in annual fees within the next five years.
This phenomenon is nothing new. In fact, the trend away from actively managed funds has been occurring for a few years now. Investors are looking for more efficient tools to lower costs and increase overall returns. The nature of open-ended mutual funds, where money is constantly flowing in and out for contributions and redemptions forcing managers to buy and sell accordingly, could be a major reason for high transaction costs that eat away at returns. A second reason could be the accumulation of excess commissions to cover research and other services, known as soft dollars.
The Securities and Exchange Commission (SEC) has been trying to come up with a better disclosure method for fund expenses, but still can’t tell investors how much of their returns are reduced by fund expenses. Until then, it appears that passive investments, such as ETFs, are going to be the “go-to” option.
Here’s a calculator to see how fees eat into your returns over time.
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.