Charles Rotblut recently spoke at the 2015 AAII Investor Conference. For information on how to subscribe to recordings of the presentations, go to www.aaii.com/conferenceaudio for more details.
Though the ETF industry continues to grow by leaps and bounds, the mutual fund industry dwarfs the ETF industry. ETFs hold $960 billion in assets versus $9.1 trillion for non–money market mutual funds, according to Lipper.
Yet the growth of the ETF industry cannot be ignored. As we point out in the guide, assets held by exchange-traded funds have doubled since 2007. Barring a market meltdown (I know, bite my tongue and toss salt over my shoulder!), the industry could top the $1 trillion mark in the coming months. Considering that investors vote with their wallets, this is a clear sign that ETFs have become a mainstay of many portfolios.
The next round of growth for the ETF industry could come from actively managed ETFs. At press time, more actively managed ETFs are either in the planning stages or awaiting a blessing from the Securities and Exchange Commission.
A hurdle for the industry is the Investment Company Act of 1940, often called the ’40 act. This act governs how investment companies should be regulated, but it was enacted long before the creation of the first exchange-traded fund. The unintended consequence is that providers of new ETFs have to seek exemptive relief from the SEC. Complicating matters is the new financial reform law (aka the Dodd-Frank act). Tom Lydon, the publisher of ETF Trends, explains the problem in greater detail and discusses some of the other trends occurring in the ETF industry here.
The growth in actively managed ETFs is likely to start on the fixed-income side, with most of the new funds following some type of bond strategy. One of the biggest new funds could be an ETF version of PIMCO’s Total Return fund (PTTRX), a popular mutual fund. Other mutual funds could also potentially be replicated as ETFs.
The big impact for investors is an increasing need to compare ETFs with mutual funds. The choice is not which type of fund to use, but rather which fund best fits into your portfolio. ETFs have lower costs, while mutual funds feature a large choice of actively managed strategies. Look for the fund that best fulfills your needs, rather than focusing on whether it is an ETF or a mutual fund.
If you have a personal preference toward ETFs or mutual funds, however, do not feel that you have to change your portfolio. Though the two types of investments are interchangeable, there is no reason to change your strategy if it has been successful in helping you achieve your financial goals. For example, we plan to continue to offer a Model ETF Portfolio and a completely separate Model Mutual Fund Portfolio.
Starting in this month’s issue, AAII Chairman James Cloonan will provide a combined update for the Model ETF and Mutual Fund Portfolios. This new article will be published four times a year—in the March, May, August and November issues of the AAII Journal—giving you more frequent updates. To be clear, the portfolios will remain separate; only the commentary is changing. You can see the latest update here.
The other change we made was moving the ETF guide up two months to August, from October. This puts the ETF guide exactly six month’s apart from the February Mutual Fund Guide, and has the benefit of giving you a mid-year update on how various categories of funds are performing.
The ETF guide starts here. Contact information for the many of the fund families is listed here. An online version of the guide, which covers even more ETFs and has a downloadable spreadsheet, is located at www.aaii.com/guides/etf-guide.
Wishing you prosperity, Charles
Charles Rotblut, CFA
Editor, AAII Journal