Continuing with a change we made last year, our annual mutual fund and exchange-traded fund (ETF) guides are combined into one issue. Putting the two guides together makes it easier to compare similar mutual funds and ETFs.

Your preferences and constraints will influence your choice of which type of fund to own as neither is necessarily better or worse than the other. Participants in 401(k) retirement plans or 529 savings plans may commonly find mutual funds to be their only choice. Investors preferring exposure to factor funds will find more choices among ETFs. You may like having the ability to buy and sell throughout the trading day, which would make ETFs the preferable option. Those who dollar-cost average may prefer mutual funds. (Some brokerage firms allow fractional share purchases of ETFs, though. I buy fractional shares of ETFs in my accounts at Fidelity.)

A preference for active investing has historically led investors to own mutual funds. ETFs have been the province of passive (index) strategies. Though this is still mostly the case, the winds of change continue to blow. Almost 300 actively managed ETFs were launched last year. Those ETFs included offerings from traditional mutual fund companies such as, but not limited to, American Century, BNY Mellon, Gabelli, Janus Henderson, Nuveen, Putnam and T. Rowe Price. Even Dimensional Fund Advisors (DFA)—whose mutual funds have only been accessible through financial advisers approved by the company—launched four actively managed ETFs in 2022.

Investors have largely ignored these new ETFs so far. The median assets under management (AUM) for these new active ETFs is a mere $18 million. The median average daily trading volume is 4,000 shares per day. These are very small numbers. Neither number tells you anything about the quality of ETFs, only that, as a group, they have yet to generate much interest.

The danger of very small ETFs and mutual funds is that they could eventually be shut down. Both mutual funds and ETFs need to achieve a certain size to realize economies of scale. Multiplying the median asset size of 2021’s new actively managed ETFs by their 0.74% median expense ratio leads to a median fee revenue figure of $133,200. This estimated amount not only has to cover all expenses related to running an ETF, but it also has to justify the allocation of resources. Often, the lack of potential upside becomes apparent enough to cause the fund sponsor to shut the ETF down.

I do keep an eye on where investors choose to allocate their money. The Investment Company Institute publishes weekly data on mutual fund flows. These flows mostly reflect the decisions of individual investors. Last year, we saw money continue to flow out of equity mutual funds. Where did it go? Well, some of it went into bond funds. Yes, during what was a very good year for the stock market and a bad year in terms of rising inflation, bond mutual funds saw inflows. The largest bond fund—Vanguard Total Bond Market Index (VBTLX)—saw its AUM increase by nearly 5% last year even though its 2021 return was –1.7%.

It’s not clear where the rest of inflows went. Purchases put investor dollars directly into mutual funds and redemptions pull money directly out of mutual funds. Net issuance of ETFs, which is different than buying and selling ETFs on the open market, was positive last year but those numbers reflect demand from both institutional and individual investors.

What we do know is that investors—both individual and institutional—lack the ability to predict where the market is headed, much less time its movements. This is why we’ve been continuing to discuss the importance of being goal-oriented. As individual investors, we have goals that are very personal to us and have identifiable (or at least reasonably estimable) time horizons. These decisions help us tailor our allocation decisions and choose the investments that are best for us, be it a mutual fund, an ETF, an individual stock, etc.

Before I finish, I want to share a quick update on the supply chain. Just before the Martin Luther King Jr. holiday, our printer informed us that a “backup of rail cars in Chicago that are in need of unloading and moving” would cause delays in the delivery of the print editions of the January AAII Journal. If you are reading this in the print edition, you can avoid such problems in the future by switching to digital delivery. To switch, contact Member Services at members@aaii.com, call 312-676-4307 or go to My Account, scroll down to My Subscriptions and click “Opt Out” by AAII Journal.

Wishing you prosperity,