In the ongoing war between mutual funds and ETFs, investors carefully weigh expenses, transparency and the need for active management when deciding to gain exposure to the market. Although mutual funds remain the prominent choice for individual investors, many analysts say the passive funds tracking stock indexes are gaining in popularity.
A nationally known financial adviser recently said at an ETF conference that mutual funds will cease to exist in the next two decades. Most analysts agree that mutual funds aren’t going anywhere soon, but they do believe that they’ll have to change their models in coming years to compete with ETFs and offer investors the best of both worlds.
At the IndexUniverse Inside ETFs conference in early February, independent financial adviser, author and talk show host Ric Edelman said that he believes ETFs will entirely replace mutual funds within 15 years. His belief is based on current trends and what he calls an “outdated” investment model that was created in the 1920s when business was done with a paper and pencil. Edelman believes that the transparency, tradability and low-cost of ETFs trump anything the typical mutual fund can offer.
According to IndexUniverse, the ETF industry is in a massive boom, with $1.4 trillion spread across more than 1,400 funds. Yet mutual funds remain the dominating investment vehicle. According to the Investment Company Institute’s 2012 Investment Company Fact Book, an estimated 90 million individual investors owned mutual funds in 2011. That included 44% of all U.S. households having some sort of stake in a mutual fund. Of those, 68% held more than half their assets in mutual funds, and the average number of funds owned was four.
Proponents of mutual funds argue that ETFs cannot provide the active management that most fund investors seek. Michael Binger, CFA, senior portfolio manager for Gradient Investments, believes there will always be a need for both ETFs and mutual funds. Binger says that although data indicates few active managers ever beat comparable indexes, the mere opportunity that some can and do will always leave a demand for actively managed mutual funds.