Exchange traded funds (ETFs) have become a significant and legitimate challenger to mutual funds, which provide managed and diversified options for investing in the market. Recently, however, rather than eating away at mutual fund assets, some ETFs are eating mutual funds whole.
According to Elizabeth Trotta of SmartMoney, “Several ETF houses are preparing to swallow up older mutual funds and incorporate them into the youngest part of their business.”
One example is from Huntington Asset Advisors, which is preparing an actively managed ETF that will mimic one of its mutual funds. Once the ETF is off the ground, Chief Executive Randy Bateman plans to fold the mutual fund into the new ETF. [ETFs: No Longer Just Mutual Fund Supplements.]
“For the fund firm, such conversions come with clear benefits. They lend instant credibility to the new ETF, including a history of returns for investors to use in assessing whether the manager or model is competent. These conversions also mean lower costs than a typical new ETF because of the instant infusion of assets.” [3 Things to Know When Using ETFs.]
For investors who may be more accustomed to the mutual fund model, there are some things to understand.
The most important thing to know is that ETFs will inherently have a bid-ask spread that may at times cost an investor some money, so it’s important to watch this when trading. [ETFs vs. Mutual Funds.]
In addition, if your mutual fund plans on a conversion, you will want to ask these questions:
What happens to your shares?
After a successful shareholder vote, your mutual fund shares will be converted to ETF shares.