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&8217;re changing the very structure of their industry. It&8217;s not just about being new, creative, or disruptive—it&8217;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&8217;t giving them economies of scale in terms of fees or performance. According to Matt Hougan, President of ETF Analytics, 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.
At the beginning of the end:
The last of the old dominant players start moving from denial to adoption.
- 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
Products using the new technology achieve broad acceptance
- The SPY ETF has more than $100B in assets under management
Remaining structural/regulatory barriers to the new technology start falling
- Most 401K plans ($2.5 trillion in assets overall) do not offer ETF products, but because of ETF&8217;s lower expense structures this will change.
The key benefits of the new technology are apparent to everyone
- 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)
The old businesses still in denial will shift from data based arguments to fear
- 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&8217;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 |