Mutual funds could be gearing up for another painful year if actively managed exchange traded funds (ETFs) have any say in the matter. Sidelined investors are increasingly wading back into the markets and they’re shunning mutual funds in favor of ETFs. It’s easy to see why as ETFs offer tax efficiency, liquidity and the ability to get instant, diversified allocation to a specific asset class or sector.
In 2011, expect actively managed ETFs to make a long awaited entrance as the SEC will be granting notable managers approval of their active management disciplines in an ETF form. Big name fund managers like T. Rowe Price have missed the ETF boat and are hoping offering actively managed ETFs with get them in the game. These new ETFs will offer all the advantages of an ETF along with the customized stock-picking of actively-managed mutual funds – minus those high fees. [Asset Managers Jump Into ETFs.]
Jonelle Marte for SmartMoney says that the average net expense ratio on an active ETF is 0.70%, while the average on stock mutual funds is 1.29%. Active ETF fees are higher than the average passively managed ETF, but it’s a significant savings over what mutual funds charge.
Since May 2006, investors have pulled out $342 billion from actively managed U.S. stock mutual funds, while passively managed funds, most of which are index funds, have seen $123 billion in inflows in the same period, according to Morningstar.
ETFs will continue to eat into mutual funds’ market share, especially in these price-conscious times, though we don’t expect them to take over the market anytime soon.
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.