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As part of the competition between mutual funds and exchange traded funds, investors recently voted with their portfolios for ETFs. Today, at least three fund issuers intend to convert some of their mutual funds into ETFs
ETFs can be traded all day like stocks as their prices go up and down. They often have lower costs and result in lower tax bills than mutual funds.
But mutual funds, which are only priced once a day, can be more stable in some ways. During a two-week period in March, when the markets turned volatile, bond ETFs traded at huge discounts from their net asset value, or NAV, which is the value per share of the fund’s holdings. This means that if you wanted to sell your fund in the midst of the turmoil, you would have suffered even greater losses than the market downturn warranted.
Bond ETFs typically trade at prices close to net asset value, but during the so-called pandemic panic some major bond ETFs are trading at haircuts of 7% or more before recovering in April. Partly because of the daily pricing of mutual funds, their investors haven’t faced the same issues.
Dimensional Fund Advisors of Austin, TX filed a request to convert four tax-managed mutual funds and two core mutual funds to ETFs in November, a move the company plans to lower fees from. management up to 0.15%. Guinness Atkinson Asset Management, which is based in Milwaukee, plans to convert several funds, as does the Nottingham Company, a fund administrator from Rocky Mount, North Carolina.
Dimensional Fund Advisors does not plan to convert additional mutual funds, said Marlena Lee, global head of investment solutions for the company. “Because we want to provide our clients with choices in how they invest with us, we intend to have a full line of mutual funds and ETFs,” said Dr. Lee.
Investors can also look to other mutual fund companies, like Vanguard, which offer ETF versions of some of their mutual funds.
While mutual funds still outperform ETFs, with $ 22.5 trillion in assets compared to $ 4.7 trillion for ETFs, the recent trend has favored exchange-traded funds. ETFs had total inflows of more than $ 509 billion in 2020, according to Elya Schwartzman of ES Investment Consulting in Marin County, Calif. Mr. Schwartzman projected that mutual funds took in only $ 209 billion in the year. This includes $ 679 billion that has been invested in money market mutual funds, looking for a safe haven.
Without money market inputs, long-term mutual funds lost $ 470 billion in cash outflows for the year. According to the Investment Company Institute, a professional group, only 32% of mutual fund issuers recorded net cash inflows in 2019, compared to 74% for ETFs.
ETF managers point to several specific advantages of exchange-traded funds over traditional mutual funds. They include greater transparency in operations and reduced operating costs. And because of the way mutual funds are structured, investors can find themselves facing capital gains taxes at the end of the year even if they haven’t redeemed their shares and although the stock price ended the year with a loss, a surprise that is unlikely to ETF shareholders, who only pay capital gains when they sell the fund at a profit.
Another benefit cited by Jim Atkinson, Managing Director of Guinness Atkinson Asset Management, is the ability to trade ETFs during the day.
“With mutual funds, you don’t know the real price,” Mr. Atkinson said. “With an ETF, you can place a market order and know the price. Many advisors don’t like to put their clients in a situation where they don’t know the price until the end of the day. “
Guinness Atkinson has been working on converting these funds since mid-2018. This involved negotiating with regulators and contacting shareholders.
The conversion process is complex. Fund managers typically start a shell ETF and then merge the existing mutual fund into the new ETF. This will prevent shareholders of the converted mutual funds from paying taxes as a result of the change.
Unlike many ETFs that mimic established indices – like the S&P 500 – these converted funds will continue to be actively managed based on the mutual funds they replace.
“I think this is a good thing for investors, and in the longer term, it will be a good thing for companies making this change,” said Andy Kapyrin, partner and co-director of investments at RegentAtlantic, a manager of Fortune of Morristown, NJ. “Mutual funds were revolutionary, but ETFs are just better newer technology.”
But Kenny Polcari, managing partner of Kace Capital Advisors in Boca Raton, Fla., Doesn’t see much benefit for ETFs. For example, Mr. Polcari prefers the relative opacity of mutual funds and their quarterly reporting of their investments. holdings because it is less frequent disclosure prevents investors from engaging in spot trading based on what the fund is buying or selling.
“The managers say these are actively managed funds and could be more actively managed than current ETFs, but I prefer a mutual fund with a more long-term approach,” Polcari said. . “I don’t think this is the next investment vehicle that everyone is going to flock to. It sounds sexy, but I wouldn’t go into an actively managed ETF.
Fund managers report responding to their clients’ requests for years to add ETFs they can use to create personalized portfolios for their investors. The Securities and Exchange Commission approved new rules for ETFs that took effect in December, eliminating a lengthy and costly approval process for new funds and allowing potential new tax benefits for companies issuing ETFs.
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