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I particularly agree with the first part :"The average investor is not going to like ETFs when the markets tank, and they're going to think they're the best thing since sliced bread when the market's going up."
I also agree with that quote, but the article itself doesn't really explain why. It mentions that double and triple-leveraged funds can add to gains and exacerbate risk (usually more of the latter), but I don't think that's the point.
I fully don't understand what they are trying to say. Not all savvy investors are going to dump Mutual Funds. It would behoove all investors to have both ETFs and Funds in their Portfolio. That is just my opinion.
Reply to @Anonymous: I think there is certainly a place for both, as well - and there are plenty of ETFs that cover more specific sectors that mutual funds do not. I think a mass movement to ETFs is just part of an ever-increasing herd mentality, then when the market dumps next, people will run screaming from ETFs, whereas a well managed fund may avoid some of the downside.
Honestly, I think that this trend to lower cost ETFs will continue. Costs matter and always will, and high costs definitely serve as a headwind to future performance -- savvy investors know this and common investors are recognizing this as well.
And the average investor will not like fully invested equity mutual funds or ETFs when markets tank, and when the market rebounds, the average investor will think that both types of investments are the best thing since sliced bread. And likely, the common investor will sell both investments at market lows and buy them at market highs. History tends to repeat itself.
There are far too many actively managed funds with mediocre to poor performances that charge relatively high to exorbitant expense ratios. These funds must and will be picked off by the much lower cost ETFs. These OEFs are analogous to noncompetitive businesses which must and will go out of business.
In my own portfolio, I definitely study ETF alternatives to actively managed funds when I am planning a purchase. Also, there will be more actively managed ETFs coming out in the near future, which will put even more pressure on the dinosaurs of the mutual fund industry. They must and will die !
Reply to @kevindow: I certainly have nothing against ETFs and own a few of them myself, but I don't see them as "the future", but more as offering more options and in many cases more specific options than one can find in the mutual fund world. If I want to invest in fertilizer companies, there's not really a mutual fund, but there is the SOIL etf (and there is the FOOD/BARN etfs, although those apparently are ending.) Still, I have seen very few actively managed ETFs so far that have provided compelling performance - yet.
I'm looking forward to new ones, but there's been ETFs that have either been so far disappointing (Cambria Global Tactical) or funds that have turned in fine performance but have been so specific or eccentric - the TrimTabs Float Shrink etf (which is managed by TrimTabs head Charles Biderman, no less), for example, which has average volume of about 500 shares per day - that I can't see them continuing if they can't drum up more interest. While I think the amount of specific industries that one can invest in via ETFs is interesting and in many cases useful, many are going away because they aren't getting enough interest, either.
Do I think that there are many actively managed mutual funds that are too expensive and/or offer lackluster performance? Sure, but I guess I don't see how actively managed ETFs will not result in the same situation over time - tons of funds, some good, some bad, some expensive, some not (although given the industry, I think the "not"s will be the minority - I don't see actively managed ETFs being revolutionary, but more of a continuation.) I do think there's some interesting CEFs out there, such as tech private equity fund Firsthand Technology (SVVC), which someone mentioned the other day. The FPA-managed Source Capital (SOR) would be another, or even the recent Doubleline fund.
Reply to @kevindow: I agree that many diversified ETFs have the edge on ER over the average actively managed mutual funds. Same goes to index funds. However, lower ER is only one of the many criteria for constructing a globally balanced portfilio. Thus, this calls for a mix of (well managed) mutual funds, index funds, and ETFs.
Comments
Honestly, I think that this trend to lower cost ETFs will continue. Costs matter and always will, and high costs definitely serve as a headwind to future performance -- savvy investors know this and common investors are recognizing this as well.
And the average investor will not like fully invested equity mutual funds or ETFs when markets tank, and when the market rebounds, the average investor will think that both types of investments are the best thing since sliced bread. And likely, the common investor will sell both investments at market lows and buy them at market highs. History tends to repeat itself.
There are far too many actively managed funds with mediocre to poor performances that charge relatively high to exorbitant expense ratios. These funds must and will be picked off by the much lower cost ETFs. These OEFs are analogous to noncompetitive businesses which must and will go out of business.
In my own portfolio, I definitely study ETF alternatives to actively managed funds when I am planning a purchase. Also, there will be more actively managed ETFs coming out in the near future, which will put even more pressure on the dinosaurs of the mutual fund industry. They must and will die !
Kevin
I'm looking forward to new ones, but there's been ETFs that have either been so far disappointing (Cambria Global Tactical) or funds that have turned in fine performance but have been so specific or eccentric - the TrimTabs Float Shrink etf (which is managed by TrimTabs head Charles Biderman, no less), for example, which has average volume of about 500 shares per day - that I can't see them continuing if they can't drum up more interest. While I think the amount of specific industries that one can invest in via ETFs is interesting and in many cases useful, many are going away because they aren't getting enough interest, either.
Do I think that there are many actively managed mutual funds that are too expensive and/or offer lackluster performance? Sure, but I guess I don't see how actively managed ETFs will not result in the same situation over time - tons of funds, some good, some bad, some expensive, some not (although given the industry, I think the "not"s will be the minority - I don't see actively managed ETFs being revolutionary, but more of a continuation.) I do think there's some interesting CEFs out there, such as tech private equity fund Firsthand Technology (SVVC), which someone mentioned the other day. The FPA-managed Source Capital (SOR) would be another, or even the recent Doubleline fund.