ETF's are said to have won the war, and mutual funds tossed into the dustbin of history:
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(don't miss page 2). There will be a short grace period beforerecommending mutual funds becomes a prosecutable offense - tee hee. Now that ETF's can be traded without commission and can be actively managed, there should be no compelling reason to use mutual funds except for when they cover a market niche not yet filled by ETFs. I will always remember the dollars I lost by the several hour delay in making M.F. buys or sells into a high volatility market day, and the SEC threat to lengthen that delay.
Now let's brace ourselves to hear from the Luddite position, romanticizing familiar ways. I recall a woebegon publishers conference a few years ago that unanimously decried e-books and claimed their world would end if people couldn't have the tactile feel of mouldy old books. Now they make money like mad with book addicts downloading twice as many e-books.
Think of the complaints if everyone read e-books, and a gov't mandate required books must be paper. There would be revolution from those cut off from impulse downloads or environmental concerns. Similarly think of an ETF world where mutual funds were being introduced. An almost useless step backwards I think. Nice if you want to purchase a fractional share, but...
(don't miss page 2). There will be a short grace period before> recommending mutual funds becomes a prosecutable offense - tee hee. I like reading Jaffe for recreational purposes, and have even exchanged email with him. But his writing tends to be simplistic and hyperbolic. While I generally try to avoid ad hominem comments, where you wrote in the passive voice ("are said to"), what you really meant was "Jaffe said".>
"Without commission". You can trade stocks without commissions too. No one believes that the brokers aren't making a pretty penny off of that. Their profit comes from the spread. With an open end mutual fund, you get 100 cents on the dollar. With an ETF, you get less, and the funny thing is you'll never know just how much less, because you won't ever know the NAV of the share when you bought it.
That gets us to transparency - one of the alleged advantages of ETFs (and one on which Jaffe is hanging his hat, at least in the cited article). A canard, little more. See, e.g.
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The more actively managed the ETF is, the less idea you'll have of what's in it. (This follows from the conceit that if a fund is tracking an index, you've got a fair idea of what's in it, even if the fund isn't disclosing its holdings for months; but if it isn't, you're absent that clue.)
Mutual funds can be traded more than once a day (Fidelity Select portfolios used to trade hourly; other funds still trade more than once a day - Jaffe is wrong when he writes without qualification that mutual funds trade once per day). If this were so important to large numbers of investors, wouldn't there be more such funds? At least before ETFs became popular?
I do find an appeal to "new technology", whether it is yours, or Jaffe's, curious, given the blame piled on the financial industry for its destructively "innovative" vehicles. It's not that ETFs fall into the category of bombs, but rather that the line of "reasoning", relying upon praise for "new and improved" has been shown to be flawed.
Personally, I feel that ETFs have their place, and I use them judiciously. But I'm under no delusions as to their hidden costs, their hidden holdings, and their hidden risks.
(don't miss page 2). There will be a short grace period before> recommending mutual funds becomes a prosecutable offense - tee hee. >> Now that ETF's can be traded without commission and can be actively> managed, there should be no compelling reason to use mutual funds> except for when they cover a market niche not yet filled by ETFs. I suppose if mutual funds are inferior to exchange-traded funds, they will eventually go out of business, and loads, MERs, active managers, sales people, and all will be things of the past. If people stop buying them and invest elsewhere instead, those mutual fund companies can't survive, can they? That is the way the free-market system works, isn't it?
Perhaps the mutual fund industry today is at roughly the same position as the cigarette and tobacco industry a few decades ago. People were beginning to question it, not too strongly at first, but things accelerated. I can remember some of the rationalizations that no link between cigarettes and cancer had been established. Nowadays many people still claim that active management adds value to mutual funds. Old ideas die hard.
Also, think of the drug companies. Those companies once complained about generic drugs, arguing that brand-name drugs were safer and worth the extra price. Are actively managed funds worth 2% of the value every year and sometimes another 5% of the original investment to boot? Are brand-name drugs worth the 100% or more difference in price because of the responsibility and reputation of a well-known manufacturer? There is a lot in common between those two questions. Time marches on.
My wording was clear enough in context (for nonlawyers anyway). But I agree the article and some of my remarks were somewhat loose and provocative. There have been a number of such articles, and I lost track of a more serious one which showed hard $ numbers of ET holdings seriously eroding the mutual fund market share. These articles seem too numerous to be googled up easily, and one realizes they may be marketing fluff by being gratuitously spread across multiple pages (sometime 6) just to make you hit on more ads.
However I disagree on your point about the availablity of hourly or twice daily traded mutual funds. They tend to be only for very volatile specialties and I think with high management/marketing fees. People may not realize until too late that they need sub-day tradeability. My worst case I think was retiring and changing custodian of 401k - a major once in a lifetime event. I could not get those slugs to liquidate money on a day the market was death spiralling, but had to take another full day of death spiral on top of it. Then naturally there is a dead cat bounce to make the reinvestment expensive.
I can live with point spread expenses. Etrade no longer rebates mutual fund owners with part of the marketing fees (which were generous, boo hoo) so you pay one way or the other. You can even try to benefit with a rarely traded etf that threatens huge spreads. Put out a lowball limit buy or highball limit sell and trip up some market price trader in a hurry. I really hate to do this, but it has been done to me. The root problem is SEC mandates too-hasty market order matching.
I just heard L. Fink from Blackrock (world's largest asset manager?) talk about this issue. Unfortunately he didn't mention the percentage of M.F. vs etfs, but he did say etf usage was growing not so much at the expense of mutual funds but by a huge switch by institutions from individual stocks to etfs.
However he did support the theme of the article that recent etf innovations will allow them to be dominant over mutual funds. Not that everyone is itching for an actively managed etf or whatever, but such features just cut back the compelling case for new buyers to ever be pushed to mutual funds if they are comfy with etfs. Present mutual fund holders may not feel compelled to switch to etfs, but new investors may think etfs as a default and rarely feel compelled to use mutual funds.
I was aware of the large growth in institutional use, but hadn't gotten to digging up data. Thanks for reporting this.
One needs to be careful with factoids, though. Blackrock is indeed the world's largest asset manager, which provides them a good amount of raw data, but are they the world's best analysts? (Not saying they're not, just pointing out that dots need to be connected.) Another factoid: Blackrock is the world's largest ETF manager (biased?). Isolated factoids can distort as easily as enlighten.
How much of this change in mindset is driven by ETF marketing and hype? Even if investors think of ETFs first, should they? Here's an article pointing out that in Singapore, most ETFs are derivatives, with inherent issues.
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lumped together with ETFs in most marketing, have similar issues. Then there are commodities. Funds "tracking" commodities have their own problems (largely due to use of forward contracts); commodities seem to be an area of strength for ETFs.
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To reiterate a comment I made before: I'm not universally knocking ETFs. They are a useful vehicle, and I use them judiciously. All things in moderation.
They are not, however, no-brainers, which unfortunately is the way they're being marketed (notably by Blackrock, which brings us full circle).
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"iShares are simple, liquid and transparent products". As above, they are not simple, and as I stated in my last post, they are not necessarily transparent.
Well said. I certainly would prefer no-load ETFs to the majority of mutual funds. But there are a few families such as Vanguard whose Admiral Shares with index funds are hard to beat except for really-active investors. I am about as passive as they come, have been with Vanguard for decades would not consider moving that money to ETFs.
On the other hand, many investors, particularly those who prefer active management, IMO would benefit from no-load ETFs in lieu of most retail funds.
I'm curious, do your trade tickets for ETFs have a stamp something like this?
"BROKER receives compensation from the fund's advisor or its affiliates in connection with a marketing program that includes promotion of this security and other XX funds, as well as the waiver of commissions for online trades in certain XX funds"
My assumption is that any free-trading programs are either self-funding, through buried costs, or temporary marketing programs to draw assets. Regardless, any approach based on the assumption that trading is commission-free might break down should trades no longer be free. Given that the ETF vs open-ended no-load fund comparison is one of shaving pennies, at least for the sorts of ETFs long-term investors might be looking at, an end to free trading (or recognition of hidden costs) could require a rethink.
Surely the hidden costs of no-commission etfs must be lower than the recurring fees of even no-commission mutual funds? Anyway I don't stick to free etfs or even strongly lean toward them - just a happy occasional user.
With etfs I was sorry to lose the ability of trading mutual funds "one into another" (within a family), but now am doing a similar thing with etfs. A one-triggers-the-other type trade can sell x shares of A and then buy y shares of B with the proceeds. On the surface it might look a little risky, especially if the share values float around a lot. But you can even look for some tax advantage by making the first trade contingent on a few percent loss. Then if the share prices are whip- sawing up and down, you get a little relief on capital gains on the sale.
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