Why your mutual fund could become an ETF
In the 1970s, index funds grew out of mutual funds. And in the1990s, ETFs emerged from the world of index funds. Today, we stand at a critical point where mutual funds could soon turn into ETFs: a sector that has seen considerable growth in the last year.
What’s the difference between a mutual fund and an ETF?
Investors pool money to buy assets contained in each of the funds. There are, however, some minor differences. For example, investors can only purchase a mutual fund at the end of the trading day whereas an ETF can be bought throughout the trading day. ETFs are also considered to be more tax-efficient, primarily because their structure allows losses to be offset against capital gains. While both investment vehicles come in actively and passively managed forms, most ETFs are passively managed while mutual funds usually have an investment manager or management team at the helm.
Late last month, Guinness Atkinson Asset Management converted two of its mutual funds into ETFs. For the $5.9 trillion ETF industry, this pioneering move has paved the way for more conversions. Vanguard has also been switching its assets from mutual funds to low expense ratio ETFs for some time now. While this doesn’t technically qualify as a conversion from mutual funds to the ETF model, it does point to changing trends in the industry.
Attracting more inflows
Mutual funds have been struggling to pull in investors, largely due to the increasing popularity of ETFs. ETFs are easier to trade and have lower fees. Naturally, traders and investors prefer to have more flexibility with their money and want to avoid fees as much as possible. The ETF model provides those benefits. During 2020, mutual funds lost about 362 billion dollars whereas ETFs received inflows of 500 billion dollars. This was due in part to managers looking to utilize the benefits ETFs provide and responding to changing client demands.
In June this year, Dimensional Fund Advisors will convert over 20 billion dollars worth of mutual funds into ETFs. The Texas-based company already manages over 600 billion dollars in assets and with the planned move towards ETFs, it will become a part of the 12 largest ETF issuers in the United States. Guinness Atkinson Funds is also considering switching its Alternative Energy Fund into an ETF. Other firms contemplating a conversion include Foothill Capital Management and Adaptive Investments. That said, it’s clear that widespread mutual funds conversions are certainly going to help funnel in more cash to the already booming ETF industry as more and more firms get on board.