We’ve reached out to several advisors and ETF manufacturers to get their impressions of the state of the ETF market. We will present these findings over a four-part blog series and start with Part 1 on the advisor’s perspective on ETFs versus Mutual Funds.

Introduction

The growth of exchange traded funds (ETFs) as a core part of client portfolios over the past 10-15 years has been remarkable, prompting early speculation about the demise of mutual funds as a product class. 

While the growth of ETFs has been dramatic, mutual funds have managed to survive—and even thrive—in the ever more competitive product marketplace. The evolution of more efficient and lower-cost mutual fund products, improved tax minimization capabilities, enhanced active management, and access to emerging markets have allowed mutual funds to compete effectively with ETFs. 

In response, ETFs have also adapted to become more competitive by offering more actively managed products. As a result, both ETFs and mutual funds are now on a much more even playing field with increased options for advisors and investors. 

As the MFDA expands the product shelf to include ETFs alongside traditional mutual fund offerings, we polled advisors to ask how they are using ETFs in their portfolios and how the two product classes compare. Our findings are summarized in the pros & cons list below:  

Exchange Traded Funds

  • Pros
    • Lower fees and lower operating expenses
    • More liquid because they trade on exchanges
    • More portfolio diversification opportunities
    • Advisors can offer an expanded product shelf
    • ETFs fared well during the recent market downturns
  • Cons
    • Trading process is potentially less efficient than with mutual funds
    • Additional compliance and supervision steps are required by some firms
    • Difficult to invest 100% of client cash with single trade due to market pricing
    • Clients are potentially more aware of market volatility if they own ETFs and see the price fluctuations

Mutual Funds

  • Pros
    • Smoother, more efficient process 
    • Ability to invest 100% client cash and set up ongoing automated investment plans and contributions
  • Cons
    • Higher fees and higher operating expenses (though they are starting to come down)
    • Only allow transactions once per day
    • May not align with client best interest and client goals; may lose clients because of this

ETFs and mutual funds have a lot in common but they have some key differences, as well. Regardless of what you are comfortable using at the end of the day, having access to the right product mix for your clients and your business is what’s important. 

Did you know MFDA advisors can sell ETFs using the Univeris platform? For more information on getting licensed to sell ETFs through your dealer, contact your head office to learn more. 

Stay tuned for Part 2 in our series on ETFs.