Change to Accelerate Investment Returns continues our conversation on the big 3 investment choices. This discussion starts our look at choice number 2, Exchange Traded Funds (ETFs). Switching to ETFs offer mutual fund holders the potential to more than double returns! That is a change worth making!
This Part 5 of the White Top View Series, Investment Choice discusses the basic choices for investors. Links to all parts of the series are at the end of this post.
Investors Lower Costs For The Same Market Exposure
An ETF with exactly the same holdings as a mutual fund can double the net returns to an investor! Potentially improved returns could be even greater than that! ETFs have a huge cost advantage over mutual funds which makes all the difference.
Key point in this comparison: real net liquidated return. That is money actually in the investor’s pocket after all costs. Those are not the progressive annual numbers reported by some mutual fund companies that are close to nonsense. Too often the real cost of owning mutual funds are cleverly and legally obscured.
Few investors are capable of seeing through the dense smoke. This well obscured industry secret exists because so many people make great amounts of money with the current scheme of things. That means, year after year, little change happened.
But Times Are Changing
Regulators are well aware of the issue. For over 15 years the mutual fund industry has fought tooth and nail to protect their scheme of obscuring costs with foggy reporting. I used to say the prospect of any regulator addressing this issue was so low that for all practical purposes it does not exist.
But times are changing! Proposed regulation changes will make mutual fund companies clearly report both compensation and performance.
The banks, which dominate mutual fund distribution in Canada, harvest huge returns from mutual fund related fees. That revenue is a key part of the stellar returns reported by the banking and wealth management business sectors. Understandably, to protect those fat profits, they continue to fight any change requiring full or plain disclosure.
Perhaps sometime within two years or later, changes could actually come into effect. If so, both the compensation paid and returns earned by the investor will get more clearly reported.
The fight involves legions of lawyers so this will take some time yet. Those many fine legal minds will certainly see to it that perfectly legal ways of obscuring some costs will remain. But at least the big direct fees and compensation paid, should eventually be more fully exposed.
When costs are more fully and clearly revealed, it will shock many mutual fund investors. The many financial advisors milking client accounts for their fat mutual fund commissions, are going to have some awkward meetings. On a positive note, when clients wake up to those high costs, many could be motivated enough to discover they have less costly alternatives.
Don’t wait, do it now!
The ETF Difference
ETFs offer a practical, readily accessible and far cheaper alternative to paying outrageously high mutual fund costs.
The big difference? The sharply lowered expenses of ETFs account for almost all the difference.
Most basic ETF holdings are very similar to the mutual funds which we discussed in an earlier post in this series. That means ETFs give exactly the same exposure and range of choices to market opportunity. After all, when comparing similar mutual funds and ETFs, the holdings are the same, so the market performance and participation will also be the same.
The difference, shows in the costs.
As with mutual funds there are thousands of ETFs offered. Basic ETFs cover the full range of products and exposure as offered by any and all in the mutual fund collective.
From the perspective of an investor, the EFT difference gets presented as two major and very important features:
Public Listing: ETF shares or units trade on stock exchanges
Management Expenses: ETFs have exceptionally low costs
1. Public Listing
Being listed means that ETF shares trade just like any stock on a stock exchange. That makes them easily accessible to buyers and sellers. It also means the minute by minute price variance and movement are readily and publicly seen and tracked by any investor. At best, mutual funds price once a day and only seen and reported by the mutual fund company.
Investors can buy or sell their full position anytime doing market hours. There are no selling restrictions or limits as happens with some mutual funds.
Gaining access to the stock market requires investors to have or open an account with a brokerage house or dealer. In Canada that means dealing with one of the bank owned dealers or the handful of independents. In America retail investors have a considerably more dealer choices to select from.
The markets of both nations offer investors many choices. In future conversations we discuss the process of selecting a dealer or financial advisor.
2. Management Expenses
The design and structure of mutual funds began centuries ago around a system based on paper records, physical transfers, face to face interactions and deal structure. Although cutting edge then, each aspect of this old business structure involved many people and carried all the associated costs. That meant management, bureaucracy and space to accommodate them all. Those requirements impose lots of costly overhead.
In contrast, ETFs are a product of the digital age. They have all the cost and efficiency advantages that allow exponentially lower expenses. Additionally they conceived and developed a sales channel that completely bypasses the obsolete mutual fund distribution model. That greatly diminishes the need for many people, lots of space and simplifies management. All huge cost savers.
The next conversation in this series further discusses the huge cost differences between ETFs and mutual funds. The details will shock you so hold your wallet tight!
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These discussions and information intend to help you better understand markets and investing. I am not a financial or investment advisor; opinions are for informational and educational purposes only and are not intended as investment advice. For syndication of the site or blog, please contact info@WhiteTopInvestor.com.
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Links to the White Top View Series, Investment Choice