With over $2 trillion in assets under management, the U.S. exchange traded fund industry shows no signs of slowing as investors increasingly turn to the ETF investment vehicle for their portfolio needs.
ETFs offer low costs, transparency and greater liquidity and tax advantages than mutaul funds, writes Jon Stein, founder and CEO of Betterment, for CNBC. [Why Investors Should Stick to Passive, Index-Based ETFs]
Since the majority of U.S.-listed ETFs passively track a benchmark index, ETFs are typically cheaper to run, compared to most actively managed mutual funds that have to pay a portfolio manager and analysts to meticulously research and select stocks. There are 1,651 U.S.-listed ETFs on the market with an average 0.59% expense ratio, according to XTF data.
Due to the way ETFs are structured, the investment vehicle provides greater transparency. ETFs disclose holdings on a daily basis and generally maintain a stable list of components that rarely experience large changes. In contrast, many mutual funds have high turnover rates and holdings are only reported four times a year, which leaves many investors wondering what they are actually holding. Furthermore, since active funds are operated by a manager, the fund can experience a so-called style drift where the portfolio manager could begin to overweight areas away from their core investment strategy.
ETFs are also considered a tax-efficient investment tool, compared to mutual funds. Specifically, ETFs typically show lower capital gain distributions due to their passive nature and innate creation/redemption process. In contrast, if a mutual fund investor wants to redeem shares, the fund has to sell internal holdings to finance the redemption and any capital gains would be distributed pro rata to all investors. [ETFs: Tax Efficient and Cheap Investment Vehicles]