Content provided by Joe Smith, CFA, Senior Market Strategist
Here is a simple truth that has taken the investment industry a long time to come to terms with: ETFs are here to stay. ETFs have outpaced mutual funds in growth since 2005. According to Morningstar Direct data, ETFs attained an annualized growth rate of 21%, whereas mutual funds grew at 4% and many active mutual funds experienced net outflows.
So, what is all the fuss about fees these days? As noted in the U.S. Department of Labor’s recent announcement on its fiduciary rule for retirement accounts, fees and the justification behind them are expected to garner increasingly sharp criticism.
In many ways, this is not new information. Advisors have already been leaving mutual funds and flocking to ETFs as more switch to fee-based models. On average, ETFs have expense ratios that are 51% less than their mutual fund counterparts, and ETFs require lower direct costs to operate and manage than mutual funds. Much of this is accomplished through in-kind processes that ETFs take advantage of to create new shares for investors as demand grows.
Range of Fees by Product Type and Asset Class
Source: Morningstar Direct (June 2016)
ETFs also come in various forms, the latest being smart beta ETFs. Smart beta ETFs are designed to mimic commonly known strategies found in active mutual funds, but they do so via a rules-based index methodology. Effectively, smart beta ETFs are actively managed strategies in an index cloak offered at meaningful discounts to their active mutual fund equivalents, as highlighted in the chart above.
The investment industry will continue to experience a transition as fees become an even greater focus for advisors and investors. ETFs provide great value to investors by helping them not only gain targeted investment exposures but meet their long-term goals with one simple philosophy in mind: Keep more of what you earn.
The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change. No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only.