Weighing the advantages of an all-ETF portfolio
There's a natural progression in the way the public responds to innovation. Something that first seems like a mere novelty becomes an interesting new niche, then a great idea and then, "How did we ever get along without this?"
In financial services, exchange-traded funds are somewhere around the third or fourth stage, between new niche and great idea. ETFs attracted more net investment last year ($239 billion) than did mutual funds ($225 billion), according to data from Morningstar. Five years earlier the net inflow into mutual funds was more than triple the net amount invested in ETFs.
Brendan McDermid | Reuters
In the last five years, the public's affinity for ETFs raised assets under ETF management by 152 percent, to $2 trillion, up from $793 billion. Mutual fund assets only rose 53 percent during the same period.
Faster and cheaper information system infrastructure has helped the growth of ETFs. In my view, ETF portfolios will be the inevitable default for investors in the years to come because they are lower cost, more transparent and offer greater liquidity and tax advantages than mutual funds. Already, the increasing number of assets invested with automated investing services, which use all-ETF portfolios, underscores this shift.
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Frequently Asked Questions about this Article…
Exchange-traded funds (ETFs) are investment funds traded on stock exchanges, much like stocks. They are becoming popular because they offer lower costs, greater transparency, and better liquidity compared to mutual funds. Additionally, they provide tax advantages, making them an attractive option for many investors.
ETFs have outperformed mutual funds in terms of net investment inflows. Last year, ETFs attracted $239 billion in net investment, surpassing the $225 billion that went into mutual funds. Over the past five years, assets under ETF management have increased by 152%, while mutual fund assets only rose by 53%.
ETFs might become the default investment option because they are cost-effective, transparent, and offer better liquidity and tax benefits than mutual funds. The growth of automated investing services that utilize all-ETF portfolios also highlights this trend.
Faster and cheaper information system infrastructure has significantly contributed to the growth of ETFs. This technological advancement has made it easier for investors to access and manage ETF portfolios, further boosting their popularity.
Yes, ETFs are suitable for everyday investors due to their low costs, transparency, and ease of trading. They provide a simple and efficient way to diversify investments and are accessible through various automated investing platforms.
ETFs offer tax advantages because they are structured to minimize capital gains taxes. This is achieved through a unique creation and redemption process that allows for in-kind transactions, reducing the need to sell securities and incur taxable events.
Automated investing services often use all-ETF portfolios to provide investors with diversified, low-cost investment options. These services leverage the benefits of ETFs, such as transparency and liquidity, to offer efficient and effective investment solutions.
The current trend in asset management shows a significant shift towards ETFs, with increasing assets being managed through ETF portfolios. This trend is driven by the advantages ETFs offer over traditional mutual funds, including lower costs and better tax efficiency.
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