Mutual funds change forever - InvestingChannel

Mutual funds change forever

  • Many mutual funds look to change into ETFs
  • This brings the benefits of lower fees and higher demand
  • However, many studies show actively managed funds underperform the market
  • We added several important points to Schwab’s ETF checklist

Mutual funds have become the unwanted stepchild of finance.

Which is why they’re about to pull a 2006 Justin Timberlake and bring sexy back.

The Big Reveal

Outside of company-sponsored 401Ks, everyday investors rarely glance at mutual funds.

Instead, we, and increasingly big money players, are more interested in Exchange Traded Products (ETPs), Exchange Traded Funds (ETFs) being the most popular.

How popular are they?

In 2020, ETFs saw $500 billion inflows while mutual funds shed $362 billion.

Our proprietary data confirms that both retail and large money managers ETF searches far outweigh mutual fund research.

Important warning: Exchange Traded Notes (ETNs) are part of the ETP umbrella. These debt notes don’t hold anything. If they blow up, which many have, you get nothing.

Mutual Funds vs ETFs

ETFs are like mutual funds that trade during the day.

Mutual Funds only trade at the end of the day based on closing prices.

On the other hand, ETFs are bought and sold throughout the day.

Additionally, Mutual Funds:

  • Often have higher minimum investments
  • Tend to have higher fees
  • Are less tax efficient than ETFs
  • More actively managed then ETFs (leading to higher fees)

In 2020, there were 7,636 mutual funds vs 8,093 in 2018.

ETFs come in pretty darn close with 7,602 in 2020.

The most popular ETF is the SPDR S&P 500 SPY which trades over 60 million shares per day, or more than $25 billion in our 6.5 hour market day.

Some Get Left At The Dance

Not all mutual funds can become ETFs.

Mutual funds with multiple share classes across various platforms would find it too difficult.

Plus, many can’t simply because they’re embedded too deeply into retirement programs.

Don’t Go Crazy

While all this sounds great, actively managed investments don’t have great track records.

In fact, multiple studies show that as a whole, 80% of actively managed funds underperform the market.

That’s why Vangaurd’s John Bogle’s index funds became so popular.

At the moment, actively managed ETFs make up 4% of the total ETF market.

But they’re growing rapidly.

Cathy Woods’ ARK ETFs are one of the most popular.

But their performance has been questionable, especially given the risk of their portfolio.

Year-to-date, her flagship innovation ETF ARKK is down 6.85% compared to the SPY which is up 18.26%.

Since the March lows last year, ARKK is up 250% compared to the SPY 104%.

The point is that actively managed funds all have their moment. But by the time we see them, it’s usually in the past.

Keep This In Mind

Picking out ETFs can be a blast.

Schwab has a great article that covers important points when choosing an ETF.

We’d like to add a few of our own to the checklist:

  • Make sure the ETF trades enough volume. 
    • ETFs with less than 50,000 shares per day only work for long-term holds. 
    • Anything less than 10,000 shares per day should be avoided.
    • If you want to actively trade it or the options, stick with the biggest ETFs out there like the SPY.
  • Avoid holding leveraged products overnight.
    • Leveraged products track daily movements in the indexes.
    • The reset every day can erode the price of the ETF quickly unless it is perpetually in an uptrend like the market was from 2012-2020.
  • Avoid ETNs
    • You can do a quick google search to find ones that disappeared the next day.

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