Master-feed is a structure that creates flexibility for the investor. Each feeder fund has its own costs and pays for portfolio management. The theory can be available for those investors who want a strategy but do not necessarily need an ETF. This is an efficient strategy that helps keep costs down. [ETFs, Index Fund Projected to Hit $10.4 Trillion by 2017]
Another strategy used is the mimicking method. An ETF is a take-off of an existing mutual fund, but stands alone as a separate investment tool. These are inexpensive to run, but high asset levels are needed to keep liquidity and operating costs down. The most successful of this strategy has been the Pimco spin-off, BOND. The ETF has attracted $4 billion in AUM after less than one year of trading. [Mutual Fund Companies Readying Active ETFs]
Vanguard patented its ETF design in 2001, and has since become the third largest ETF manager by assets. Investors can transfer mutual fund shares into ETF shares without tax penalties, and the share-class design takes away potential problems that occur when ETFs are launched as stand alone funds.
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY and BOND.