I needed the ability to have liquidity without having to pay a huge penalty. It didn’t seem fair to have to pay high fees or that for some funds, you had to know someone to get in.
Mutual fund expense ratios are high – the average is 1.35% – one would think that the performance would bear out the high prices. But it doesn’t. About 80% of mutual funds have failed to outperform the S&P 500. What investor wants to pay so much, yet get so little in return?
The taxes can be painful, too. Many mutual fund investors can receive some big capital gains tax bills, even in years when those funds had double-digit losses.
That’s when I began to look at ETFs, and it was really no question how much better they fit into my overall investment philosophy. The advantages were so obvious: there were more choices, they cost less than mutual funds and they just made so much more sense.
- ETFs trade all day on an exchange, just like a stock
- On average, ETFs are cheaper than mutual funds – the average expense ratio is 0.41%
- ETFs are transparent – anytime you want to know the holdings, the information is available
- Investors have hundreds of choices – nearly any asset class, sector or global region you can think of is bundled in an ETF
- ETFs are user-friendly – thanks to the internet and the growing ease of getting information, it’s become very easy for investors to search for the information they want
One of the biggest hurdles advisors face when making the switch is educating their clients and getting everyone on board. With my own clients, I didn’t have to do much convincing once I laid out the differences between mutual funds and ETFs. The pros of them are too obvious to dismiss.
Since I made the switch from mutual funds to ETFs in 2003, the choices I can make for my clients have only exploded. In January 2003, there were just 113 ETFs available. Today, there are more than 700.
Making the switch to ETFs was so simple and beneficial to my business and my clients, I’d do it all over again in a heartbeat.