Why ETFs Won’t Replace Mutual Funds

February 27, 2017

Follow The Expense Ratios

Kashner ran the numbers. Three ETF fund families—BlackRock, Vanguard and SSgA—attracted nearly 89% of the asset inflows last year. Those funds had a weighted average expense ratio of 0.19%.

By contrast, Wisdom Tree, First Trust and Deutsche Asset Management had a combined $23.4 billion in net outflows. Their weighted average expense ratio was nearly three times as much, at 0.56%.

That happens to be just a tad lower than the weighted average expense ratio of the average mutual fund in 2015, according to Morningstar.

Kashner says: “The relentless march of technology and transparency has enabled investors to compare investment options across providers and vehicles. ETF investors are controlling the one aspect that is within their reach at all times: out-of-pocket costs.”

Why Some Mutual Funds Are Superior To ETFs

The coming death of mutual funds has been greatly exaggerated. Vanguard took in more than twice the assets in mutual funds as it did in ETFs in 2016. In fact, as long as clients choose to custody at Vanguard, I typically recommend the Admiral share class mutual fund over the ETF, because the funds are superior in six ways.

  1. Can buy fractional shares
  2. No premium or discount—all transactions are at net asset value
  3. No spreads between bid and ask
  4. Less cash drag, as dividends are reinvested more quickly
  5. Can do a tax-free exchange from mutual funds to ETFs, but not the reverse
  6. Can do automated dollar cost averaging

Both the Admiral share and ETF share classes have the same expense ratio and are extremely tax efficient.

ETFs are great, and I’m all for low-cost ETFs. I’m also for low-cost mutual funds, and care more about diversification, costs and tax efficiency than I do about any wrapper.

So don’t paint mutual funds as bad or ETFs as good. Low-cost, broad and boring index funds are typically superior, regardless of whether it comes in a mutual fund or an ETF.

Allan Roth is founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine.


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