His clients are frustrated over high management fees, which they feel aren't deserved because many of their mutual funds lost money last year.
"By and large, these people are lucky if they made no money over the past few years. Most of the people we see coming through our door haven't been lucky though," says Tuttle, chief executive of Tuttle Wealth Management. "So, we use ETFs maybe 95% of the time now. Clients appreciate it."
Financial advisors such as Tuttle represent the front lines of raging conflict between mutual funds and exchange traded products, in particular over management fees and related costs.
At this point, ETFs are gaining ground. Their share of the market-
"What ETFs have done is actually highlight the cost of ownership of different types of products. Part of that is looking at the performance of active funds," said
It's hard to argue against the numbers.
First, consider the fees themselves. According to data from Lipper's Advisors Guide to Fund Expenses, the average fee for actively traded funds in 2010 was 91.8 basis points, while the average for an ETF was 55.1 bps (2011 figures are not yet available). The SPDR S&P 500 Index ETF charges only 11 bps.
Investors pay an annual fee for both ETFs and mutual funds, so the difference adds up. Assuming an investment of
Then factor in the recent performance of many active mutual funds, as tracked by the year-end 2011 S&P Indices Versus Active Funds (SPIVA) scorecard. Over the past five years, 62.86% of global equity funds, 72.41% of global fixed income funds and 61.88% of domestic equity funds were trounced by their respective indices.
"Even mutual funds that appear really cheap in their category are still extremely expensive when compared to an ETF,"
ETFs won't topple mutual funds any time soon.
However, statistics from the ICI and research firm iMoneyNet show that mutual funds may be losing battles. The data, presented at the 2012
Fees frequently come up in advisor discussions. Mutual fund owners can get hit with charges for buying into and redeeming a fund as well as for the transaction fees related to rebalancing underlying securities. Depending on how the mutual fund is constructed, investors can also get hit by 12b-1 marketing and distribution fees, custodial costs as well as accounting fees.
"The idea of paying 2% of assets and 20% profit to a hedge fund manager because the manager is hot doesn't work any more," Hammer says. "A lot of people got burned by hedge funds."
Meanwhile, many clients of IRAMarket.com chief executive
"The mega-trend is towards lower fees," McNulty says. "Of course, everyone wants performance and cares about that first. But lower fees are the only sure thing you can do to help boost performance-all things being equal."
Indeed, the advantages ETFs offer for simplifying transactions often cut costs as dramatically as the low fees. For example, they can be traded intraday while a mutual fund sale closes at day's end. There is usually daily transparency with ETFs, compared to quarterly mutual fund reports. ETFs also offer a variety of tax advantages. Perhaps most importantly, ETFs don't hit investors with the burden of breakpoint reporting, according to
"Mutual funds can't beat the intraday liquidity, the portfolio transparency or the tax advantages. You get a lot of benefits for the fees you pay in an ETF, in my opinion," Williams says. "You get the best bang for your buck."
Mutual funds aren't completely defenseless in this battle. They require much less expertise from the investor. Since they are traded like stocks, ETFs also have transaction fees. Moreover, if a particular ETF is failing and lacks liquidity, unprepared investors can get hit by nasty bid-ask spreads.
Nonetheless, "it will be more and more important for traditional funds to explain how and why they are different, why they are more expensive-and why there is value in that," said Lipper fiduciary research analyst
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