The vibe of the IndexUniverse’s InsideETFs Conference in Hollywood Florida I attended in 2012 was one that I have felt before—a group that knows they’re changing the very structure of their industry. It’s not just about being new, creative, or disruptive—it’s the sense of knowing you have won.
The mutual fund industry is still almost 10 times the size of ETFs/ETNs with $7.9 trillion in assets vs $1.0 trillion, but their size isn’t giving them economies of scale in terms of fees or performance. According to Matt Hougan, President of ETF Analytics, IndexUniverse the weighted fee cost of mutual funds is 0.83% of assets, almost triple the 0.32% of ETFs. For mutual funds to become competitive on fees they would need to charge $40 billion less. With regards to performance, the numbers from 2011 indicate that 90% of the actively managed mutual funds underperformed their comparable passive indexes.
- Fidelity has announced they will be offering a wide range of ETF products
- In March PIMCO will start offering TRXT, an actively managed ETF that will track their flagship Total Returns Mutual Fund
- The SPY ETF has more than $100B in assets under management
- Most 401K plans ($2.5 trillion in assets overall) do not offer ETF products, but because of ETF’s lower expense structures this will change.
- ETFs have lower fees compared to the mutual funds with similar strategies
- The tax efficiency of ETFs is demonstrably superior, just 7.5% had capital gain payout in 2011
- ETFs trade throughout the day and their makeup is transparent to the buyer
- Alternative investment strategies are easier to implement (e.g., volatility as an asset class, risk on/off)
- ETFs are responsible for increased market volatility
- ETFs caused the flash crash
- The tax treatment of ETFs is uncertain
- ETFs short interest can exceed the shares the ETF has issued, leading to a potential collapse scenario
Just like the mainframe computer, the mutual fund will never die. Some investors will never see a reason to change, especially to something they don’t understand. Others will never buy due to fear—mutual funds have a history, unlike these new unproven things. But ultimately greed will lead most investors to overcome their fears, and mutual funds will join vacuum tubes as a technology has-been.
Thursday, March 9th, 2017 | Vance Harwood