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Convert Your Overpriced Mutual Fund Portfolio to ETFs

Investors stuck in expensive actively managed mutual fund portfolios may have a desire to move to more cost effective investment options, but may not know exactly where to begin.  ETF Database makes available a great tool to help map any actively managed mutual fund to a lower cost ETF alternative.  Their Mutual Fund to ETF converter contains information on the 10,000 largest U.S. mutual funds and finds the most comparable ETF based on the underlying benchmark for each fund.

For example, using two of the most popular actively managed mutual funds – American Funds Growth Fund of America (ticker:  AGTHX) and PIMCO’s Total Return Bond Fund (ticker:  PTTAX) yields a number of less expensive ETF options tracking the same benchmark index as the actively managed funds.  ETF alternatives for AGTHX, which uses the S&P 500 Index as a benchmark, include SPY and IVV, both of which have expense ratios nearly a tenth of that of AGTHX.  ETF options for PTTAX – which tracks the Barclays Capital U.S. Aggregate Bond Index – include AGG and BND, with expense ratios nearly a half and a quarter, respectively, of PTTAX’s expense ratio.  Interestingly, not only are the ETF options cheaper, but both SPY and IVV have outperformed AGTHX over the last two years, while AGG and BND have nearly equaled the performance of PTTAX with significantly less volatility over the same timeframe.  Whether you’re looking to transition your portfolio to all ETFs or simply curious as to whether you’re being overcharged for investment returns that can be achieved through lower cost ETFs, this conversion tool can be a valuable resource.

Schwab Bringing ETFs to 401(k) Plans

As was recently reported in The Wall Street Journal, brokerage firm Charles Schwab is now leading the charge on bringing exchange traded funds (ETFs) to 401(k) plans.  By now, most investors have become at least somewhat familiar with ETFs and the benefits they can offer including lower fees, greater transparency, and easier access to a wider variety of asset classes.  ETF assets have quickly grown to nearly $1 trillion and show no signs of slowing.  However, employer sponsored 401(k) plans have been slow to adopt ETFs as an investment option for plan participants.  One of the primary reasons for this is that 401(k)s have traditionally been the gravy train for large mutual fund companies to grow their typically expensive actively managed mutual funds.  Look under the hood of any all-mutual fund 401(k) plan offering and it’s not unusual to see average mutual fund expense ratios run 1% to 1.5%+.  Compare that with the average expense ratio of an all-exchange traded fund offering, which typically runs 30bps to 50bps.  Obviously, large mutual fund companies are hesitant, if not outright reluctant, to offer products that may significantly eat away at healthy revenue streams – even if those products may be more beneficial to individual plan participants.

That makes Schwab’s foray into this space even more impressive as the company seems focused on doing what’s right for investors, while also recognizing that the future of their company may very well depend on being a leader in the mushrooming ETF space.  As we’ve discussed in the past, Schwab has continued to expand their own proprietary ETF offerings with a focus on broad based ETFs at rock bottom expense ratios.  Without a doubt, these ETFs will be the centerpiece of Schwab’s 401(k) investment menu, though Schwab is expected to offer ETFs from other providers as well.  In referencing the mood of the large mutual fund companies and brokerages attending the asset management conference where Schwab made their announcement of bringing ETFs to 401(k)s, Mike Alfred, co-founder of an independent rater of 401(k) plans told the Wall Street Journal, “You could tell the rest of the room was nervous about it.  The idea is disruptive.”

At The ETF Store, we’ve partnered with several 401(k) providers and currently offer a number of all-ETF 401(k) plans to businesses.  We’re extremely pleased with the leadership Schwab is taking in this arena and believe this will only help to enhance the existing all-ETF 401(k) offerings and bring additional awareness of the potential benefits of ETFs to a larger group of investors.

A Better Way To Invest With Bill Gross?

Recently, PIMCO and renowned bond fund manager Bill Gross filed for registration to list an exchange traded fund (ETF) version of their highly popular PIMCO Total Return Fund.  This is just the latest example of active mutual fund managers attempting to move into the mushrooming ETF space.  Previously, active mutual fund managers have been reluctant to offer ETFs because of the daily disclosure requirements.  Unlike mutual funds, which are only required to disclose holdings on a quarterly basis (and 60 days in arrears at that), ETFs are required to disclosure their holdings daily – so investors always know exactly what they own.

As investors demand more transparency in their investments, mutual fund managers are realizing that they can either watch assets flow out of their mutual funds or operate their fund transparently via an ETF.  Give credit to PIMCO and Bill Gross for having the confidence to open the curtain on their most popular mutual fund and allow investors the opportunity to invest with greater transparency.  As Dave Nadig of IndexUniverse points out in the article, this move by PIMCO “puts the nail in the coffin for active managers who need to hide in the world of non-disclosure and poor transparency”.

Think Your Mutual Fund Advisor Is Adding Value? READ THIS.

According to recently published research by Merrill Lynch, only 1 in 5 Mutual Funds beat the market in 2010. 

Merrill said growth mutual fund managers actually did the best, with only 30% beating the Russell 1000 Growth Index.  Core managers (i.e., Growth/Value blend) did the worst, with only 11% beating the Russell 1000 Index.  The percentage of value managers able to beat the Russell 1000 Value Index was 13%.

It is interesting to note that these returns relative to the benchmarks are BEFORE the impact of taxes mutual fund investors might owe on capital gains that were distributed to those investors in 2010.  If the Merrill Lynch data had included the impact of those taxes, the relative underperformance of mutual funds vs. their benchmarks would have been more astounding.

If your advisor only uses mutual funds in your portfolio, it would make sense for you to analyze how each of your funds has done relative to their benchmarks.  Perhaps your advisor is one of the few who is able to “pick the right manager”.  Odds are, they’re not.

First Quarter Commentary

We’ve just posted our first quarter market and economic commentary.  You can download it here.