ETF Prime Archive

Fidelity to Offer ETFs?

A company known primarily for its actively managed mutual funds might finally be coming to grips with the fact that they can no longer just ignore the fast growing ETF space.  According to The Wall Street Journal, Fidelity Investments appears set to begin offering a broad array of ETFs after recently filing an application with the SEC.

As we explained way back in May of 2009, ETFs were “Eating Fidelity’s Lunch”.  Back then, it had already become clear that a primary reason for Fidelity’s deteriorating asset levels was the rapid growth of ETFs.  Fidelity was clearly concerned with entering a market that was an obvious competitor to their lucrative actively managed mutual fund business.  Remember, actively managed mutual funds charge significantly higher fees than ETFs (and more often than not, underperform the same benchmarks those ETFs are tracking).  Unfortunately for Fidelity, investors have continued to vote with their money and it looks as if Fidelity is finally realizing where the future of investing is heading.

As they say, better late than never…

Tax Loss Harvesting with ETFs and the Underperformance of Mutual Funds

Listen to The ETF Store Show every Saturday at 4pm on KCMO Talk Radio 710AM as we cover everything you need to know about Exchange Traded Funds and the world of investing.

On our most recent radio broadcast, we explained another timely, year-end topic – tax loss harvesting.  ETFs are an excellent investment tool to implement various strategies to take advantage of an area of the federal tax code that allows investors to use losses on investments to reduce their income and therefore, lower the amount they pay in taxes.  We explained several ways that investors can take advantage of ETFs to swap out of underperforming mutual funds or stocks and lower their tax bills at the same time.

Speaking of underperforming mutual funds, we also spent some time discussing a recent article on thestreet.com titled “13 Fund Managers Who Lost Among the Most Money”, which drove home the point on just how badly mutual funds are underperforming this year.  The article was full of statistics that should alarm even the most ardent mutual fund supporters including that 72% of the 261 large cap core mutual funds were underperforming their indices and a staggering 84% of large-cap growth mutual funds were underperforming.  And what’s worse for mutual fund investors is that they’re paying exorbitant fees for this underperformance.  It makes sense then, as the article pointed out, that Goldman Sachs predicts there will be $125 billion dollars in equity mutual fund redemptions, while ETFs will see $100 billion dollars in new purchases in 2012.  Why invest in expensive mutual funds that can’t deliver benchmark returns when you have low cost ETFs available that can?

Listen to the full show here.

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Are You Still Investing Using 1940s Technology?

The following is an excerpt from the article “Turning Fund Distribution on Its Head” by Scott Burns and Paul Justice of Morningstar.  Read the full article here.

The arguments over which is the better vehicle, ETFs or mutual funds, usually get bogged down in quarrels about active versus passive (which is a different debate), investor behavior, and product proliferation.  All of these diversions miss the point.  What we are really debating is technology.  Both vehicles are technologies for gathering a broad group of investors together to combine assets under a single manager.  One is Depression-era technology, however, and the other is digital-age technology.

Mutual funds are often referred to as 1940 Act funds, referring to not only the securities act that created them, but also the time period in which they were created.  In 1940, the mutual fund was cutting-edge technology.  Can you imagine being an asset manager in 1940 and being told that you had to price your fund and clear all trades at the end of the day, each and every day?  Remember, this was a paper-trading world where trades were done on the floor of the stock exchange by people flashing funny hand signals at each other.  On top of that, you had to communicate your portfolio holdings to all of your investors quarterly in public filings and mail annual reports!

In 1940, these changes were massive and onerous to fund companies, but they allowed for the creation of the $9 trillion mutual fund industry that we see today.  But it isn’t 1940 anymore; it is 2011, and the technology has made what was probably considered impossible in 1940 laughable today in terms of its capabilities.

Enter the digital age’s answer to gather assets communally:  ETFs.  Why, in today’s computerized environment, do investors need to wait until the end of the day to know what price they purchased their fund at?  Would you buy a car that way?  Would you go to the dealer at 10 a.m. and say, “I want to buy that station wagon,” only to have the salesman tell you that you should give him $16,000 now, come back at 3 p.m., and then after everyone else has bought their car, he’ll tell you how much car you bought?  Of course not, but that is how mutual fund technology works.

ETFs are investment vehicles for the digital era.  Daily liquidity is possible because the trading technology has made it possible.  Tax efficiency is improved with the injection of a secondary market in addition to a primary one.  Daily disclosure is not only required but also feasible with low-cost distribution on the Internet.  In 1940, you couldn’t have disseminated daily holdings if you wanted to.  But most important, the digital technology is cheaper.