7 Things To Consider Before Dumping Mutual Funds for ETFs

It’s difficult to deny the popularity of exchange-traded funds (ETFs) the past decade and in particular, its rise in use when it comes to the bond market. The industry has grown by giant leaps and bounds with more projected growth to occur over the next 10 years, but before investors start dumping their mutual funds for this dynamic asset, there are things to consider.

By now, the majority of investors have heard of ETFs given their rapid proliferation the past decade. Financial firms are already predicting more growth to occur in 2020 and beyond.

“The current growth rate points to ETF assets approaching $50tn over the next decade driven by a continued move to passive and increased awareness of the attractive tax efficiency, cost, liquidity and transparency characteristics of ETFs,” said Mary Ann Bartels, investment and ETF strategist at Bank of America.

Since the financial crisis in 2008, interest in ETFs have risen since they give investors exposure to a basket of stocks as opposed to individual shares, thereby limiting the higher risk associated with single stock exposure.

“Money has flooded into ETFs during this record-long bull market, while active strategies have suffered,” a CNBC report noted. “Since the inception of the first ETF — the S&P 500 SPDR — in 1993, the U.S. market has grown rapidly to a $4.3 trillion juggernaut. Equity passive funds alone, which include index funds, have ballooned to a more than $3 trillion market in less than 10 years, according to Morningstar.”

Morningstar’s Christine Benz highlighted seven things to consider before swapping mutual funds for ETFs:

  1. Taxable Account
  2. Appreciation of Holdings in a Taxable Account
  3. Heavy Stock Component in Taxable Portfolio
  4. Sizable Share of Traditional Stock Index Funds in Existing Portfolio
  5. Cost of ETFs Compared to Existing Funds in Current Portfolio
  6. Commissions to buy and sell ETFs
  7. Flexibility of Funds

Speaking to the 7th item, a large number of ETFs passively track an index as opposed to actively managed funds like mutual funds.

“The fact is, most active managers haven’t beaten low-cost, broad-market index funds over time,” said Benz. “(The data vary by asset class and time period, and the fact that most managers underperform doesn’t rule out the possibility that some active managers will beat their benchmarks.) If you’re swayed by that data, you can readily find ETFs to track the major asset classes for a very low price. And because they’re targeted rather than flexible, ETFs and other index trackers make it easy to keep tight control of your asset allocation at any given point in time.”

For more market trends, visit ETF Trends.