Macro: Sandcastle economics
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Mutual funds are LOSING market share to ETFs BUT are 'joining the game'
ETFs
Summary: The US$9 TRILLION Exchange Traded Funds (ETFs) market is poised to reach US$30 TRILLION in the next 10 years. ETFs offer several benefits that contribute to their popularity: Diversification, low cost, trading flexibility and transparency. These advantages have led a significant outflow of funds from mutual funds to ETFs, estimated at $1.5 trillion.
What is an ETF? An exchange-traded fund (ETF) is a basket of investments that is listed on a stock exchange that normally tracks an index (like the S&P 500 Index in the US or the Hang Seng Index in Hong Kong). In more simple terms an ETFs is if "a stock and a mutual fund had a baby" where it's a little like a mutual fund that trades like a stock. Although Exchange Traded Funds (ETFs) is already a US$9 trillion dollar market it is 'only' 30 years old (mutual funds ~60 years). The first ETF ever listed in the US dates back from 1993 and that ETF (SPDR S&P 500 ETF Trust) is now the largest ETF in the world with assets at US$413 billion.
So why are ETFs so popular?
1) Diversification: For long term passive investors it is an easy way to diversify your portfolio.
2) Low cost: Average cost for passive ETF is ~0.16% while active mutual funds' cost is ~0.66% in 2022.
3) Trading flexibility: ETFs can trade as many times as you want during trading hours while mutual funds can only trade once per day.
4) Transparency: You know exactly what you are investing into with ETFs while mutual funds you often only see its top 10 investments.
This is why they are GAINING on mutual funds.
Mutual funds are LOSING market share to ETFs BUT are 'joining the game'.
The mutual fund market is estimated to be ~US$38 trillion in 2022. But in 2022 we saw the BIGGEST outflow of funds from mutual funds into ETFs estimated US$1.5 TRILLION. Clearly mutual fund houses (which may own both mutual funds and ETFs) are taking notice and making changes. Back in 2021 history was made by Guinness Atkinson Funds as they CONVERTED its mutual fund into an ETF (1st time in history). Mutual Fund heavy weights like Fidelity announced last week its plans to convert US$13 billion (6 of its mutual funds) into ETFs as well.
What are the positives and negatives for the fund houses?
1) They don't lose customers versus asking them to switch to a brand new ETF;
2) They can market the funds former performance as part of the ETF's performance;
3) Tax advantages of ETFs now shared with mutual fund;
4) Can keep fee structure of mutual fund with new ETF.
More mutual funds will be converted into ETFs as ETFs continue to gain popularity.
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