Tax & Financial Consulting Services
ETF or Mutual Fund...You Decide!
After years of discussion between fund sponsors and regulators, the Exchange Traded Funds (ETF) industry finally has its first actively managed ETFs. Invesco PowerShares recently launched four new ETFs on the New York Stock Exchange after receiving SEC approval.
Since the very first ETF was launched 15 years ago, ETFs have quickly become one of the hottest investment vehicles of all time. Assets under management in ETFs soared 30% last year alone to nearly US$560 billion. ETFs have proven especially popular among affluent investors too.
It's worth noting that the very first ETF launched in 1993 was designed to track the S&P 500 Index. The fact that ALL ETFs (up until now) are designed to track indexes has been one of the key advantages to investing in ETFs. However, it's one key advantage that actively managed ETFs DON'T have in their favor.
Index Tracking ETFs Keep Costs Low
There are ETFs available today that track stock indexes, ETFs that follow bond indexes, ETFs that track commodities, real estate, specific sectors, overseas market indexes - you name it.
Index-tracking ETFs, are very low cost investments. No active management means no high management fees. As a result, the average expense ratio for ETFs is about 0.4%, while actively managed mutual fund expenses average 1.2% - three times higher!
Investors are attracted to ETFs for this very reason; low fees. Lower fees mean higher investment returns. Compound that over enough years in the market and it's easy to see why index ETFs are so appealing. In fact, they tend to consistently outperform most mutual funds.
Who Needs Actively Managed ETFs or Mutual Funds Anyway?
According to Bruce Bond, CEO of PowerShares, the introduction of actively managed ETFs "is a watershed event for the industry because people have not had access to active management within the ETF structure before now." Bond claims that active ETFs will transform the industry landscape.
Somehow, I seriously doubt that.
There are more than 10,000 conventional mutual funds in existence today. The vast majority of these are actively managed funds, with "high-priced" fund managers collecting fat fees for their investment management skills.
Unfortunately, investment "skills" are sadly lacking. In fact, over 90%...yes...90% of these actively managed mutual funds cannot beat the market index return. In fact, most fall well short of the benchmark. In other words, investors are paying higher management fees for "nothing." No wonder index-tracking ETFs are so popular.
Other big advantages of ETFs are liquidity and transparency. Actively managed mutual funds can only be bought once a day, at the end of the day, when financial markets are closed. ETFs by contrast are listed on major stock exchanges and can be bought and sold throughout the trading day, minute by minute, and tick by tick.
Transparency: Another Key Advantage for ETFs is a Roadblock for Active Managers
With ETFs you always know what you own. Regulators require ETF sponsors to disclose all their positions every day, so you can check out an ETF sponsor's website anytime in the trading day to find out what you're investing in. By contrast, mutual funds are only required to disclose fund holdings once every six months.
If other investors could plainly see what they're buying then those stocks would shoot higher, eliminating the active manager's edge or need for an EDUCATED investor.
According to one industry expert, if "you talk to any active manager that actually has skill, they don't want to disclose what they have every day...That's the last thing any money manager wants."
As a result, I very much doubt that actively managed ETFs will attract many talented money managers who could earn much more money by running traditional mutual funds (not to mention hedge funds). Far from being a "watershed event," actively managed ETFs or mutak funds just doesn't make much sense to me.
Remember, the media and the financial industry want you dependant on them for all your investment needs. Because if you are not in the know, then you are in need of them. So, in a nutshell, they flood you with mounds of information to confuse you to make it seem complicated to force you to use them to manage your accounts.
Remember, "the more you learn the more you earn, the less you know the more you owe...in taxes, fees, and you future wealth."
Tax & Financial Consultant, RFC
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"Those who do not learn the lessons of history indeed are condemned to relive them."
LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what we've learned as financial consultants. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. G&G Associates expressly forbids from having a financial interest in any security that is recommended to our subscribers.