Farewell, Mutual Funds

Eventually, ETFs will be the industry standard

John Rekenthaler, CFA 22 January, 2021 | 10:42AM

Bye in Various Languages


The Long Goodbye
Some 20 years after their 1993 debut, exchange-traded funds had become commonplace. However, several obstacles prevented them from supplanting mutual funds as the Main Street investment. ETFs lacked sales commissions, which limited their appeal to financial advisors. They were almost always passively managed stock portfolios. In addition, several ETFs had behaved erratically during the 2010 flash crash, which raised concerns about the group’s structural stability.

Those roadblocks no longer exist. Consequently, ETFs are positioned to overtake mutual funds. That event won’t happen anytime soon, because mutual funds possess the power of history. Currently, U.S. mutual funds hold US$18.2 trillion in assets, as opposed to US$5.5 trillion for ETFs. But the outcome appears inevitable. ETFs offer several advantages that mutual funds cannot match, without counterbalancing drawbacks. Eventually, assets will be on their side.

 

Exhibit 1

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About Author

John Rekenthaler, CFA  John Rekenthaler is Vice President of Research for Morningstar.

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