You may be among the advisors out there right now who are considering switching their practices from mutual funds to exchange traded funds (ETFs), but are hesitant to do so for any number of reasons, whether it’s worry about upsetting clients or fear that it might be a daunting task. It’s not difficult, and it can be an easy transition. Here are some things to consider.
ETFs are still a relative newcomer on the scene when compared with the stalwart status mutual funds enjoy. ETFs first appeared in 1993, with a fund that tracked the S&P 500. The modern mutual fund, on the other hand, has been around since 1924. Today, ETFs have $798 billion in assets. Mutual funds have $9 trillion.
Back when I began my asset management firm, Global Trends Investments, in 1996, ETFs had been around in limited numbers for three years. At this point, mutual funds were firmly entrenched as portfolio staples, while ETFs were still on the fringe.
During the late ‘90s, I used mutual funds to invest in the areas I liked (such as global, small-cap and so on). But I often ran into issues with the best managers not accepting new accounts or putting heavy redemption fees on their funds.
My discipline is a technical one: we take positions when they cross the 200-day moving average and sell when they dip below or fall 8% off their recent highs. This is often at odds with how mutual funds are meant to be used.
In volatile years that see wild market swings, the fees would have be phenomenal if we had been using mutual funds. Mutual funds don’t make it easy to use a trend-following plan when you may be buying and selling within a 60-day period.