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Jim Wiandt Analyst Blogs

Why ETFs Will Surpass Traditional Mutual Funds


There has been a small but vocal contingent of people in the ETF business that have been saying for years that ETFs would eventually make huge inroads into market share in the mutual fund business. Indeed, the American Stock Exchange, who came UP with the ETF, staked their future on the concept. The NYSE bought them before the sea change could get under way, but the signs say they were right.

Arguably still just a blip on the radar with only 1 in 20 mutual fund dollars, ETFs have now woken up the major players by taking often tremendous shares of the new flow coming into the market. And they've done this while attracting many investors who don't fall into the category of old-school index investor.

So now that I've thrown that provocative "beginning of the end" subtitle onto my blog, the question is, do I actually believe it? There are tremendous obstacles still in the way of ETFs getting into some of the biggest (retirement) asset pools, but you can begin to feel a real push in that direction. And year-over-year, the taxable money is increasingly going into ETFs, and there's now universal recognition, at least, of ETFs by financial advisors.

Add to all of that the fact that ETFs just are a better mousetrap in terms of cost and trading efficiency (all the more so for active funds, though some argue otherwise). The truth is, QUALITY, which despite all of our pessimism about obstacles to real competition in the mutual fund business, DOES ultimately drive assets.

So yes, I think the shift is beginning to happen, and is going to happen.

By the way, as a side note to Matt's blog on Eaton Vance, I DID do the math on the $5.5 billion buy-write fund at 1.2% (and this does not even account for the underwriting fee) and came up with an annual $66 million in revenues, which would put that fund at 5th on the list of greatest revenue-producing ETFs (just behind SPDRs and its massive $80 billion in assets). Yep, $5.5 billion in assets for $66 million in revenue next to $80 billion in assets for $80 million (still not shabby) in annual revenues.

And Eaton Vance could argue that the buy-write is a deal. The ERs on ETFs and ETNs, particularly in that sort of exotic strategy-focused or alternative asset space, has moved up. But it's hard to imagine it going much above the 95 bps level that ProShares set for their funds. And frankly, the active guys would have to work to justify it (but they're certainly good at that) in a straight long equity fund. So I see an expanded asset base, and a new baseline for active of less than 100 bps (the good, largest funds of the Fidelities and America Funds are already there). And their investors, Index Publications LLC among them, are smart and will increasingly call for the greater efficiency of ETFs.

And ultimately, the infrastructure (around retirement plans) will catch up to the demand. And the assets will flow ...



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