Low Fees

Speaking of low fees, the difference is very significant. I met someone from Fidelity, one of the major mutual fund players who told me that the average fee on its funds was a bit over 2% per year. Compare that to ETFs We looked at unknown ETF facts recently and the most expensive ETFs are about 1%. But for the more mainstream exposures such as the S&P500, the fees are generally under 0.10%. That is a major economy for the average investor over the years. Why do they charge less?

- ETFs are much more transparent: Since comparing mutual funds is much more difficult, its nearly impossible for you to prove that your adviser is not truly working for you. In the ETF world however, you can easily compare funds and the fees that they charge which makes it easy even for average investors to get the best deal.

- Sold by advisers. Mutual funds are usually sold by someone who is getting a cut on your investment every year, a trailer fee. That person does not necessarily have the motivation to get you the best investment as it is not what will give him the best revenues.

- More efficient structure: In a mutual fund, much more trading must be done in order to meet all of the investors buy and sell transactions. That results in more trading fees and less tax efficiency. Since ETFs have a more efficient structure, their fees are minimal which makes it possible for them to charge less.

Exposure to additional asset classes

Until recently, it was complex and costly for individual and smaller investors to get exposure to asset classes such as commodities and bonds. Yes, in theory an investor had the possibility of opening up a futures account, deposit margin and start trading futures. But in practice, it was much more difficult. In the same way, trading bonds was possible but since small investors have to trade much smaller quantities, they usually end up paying much more for bonds than a larger investor would. That made it difficult and not very attractive for investors to trade such asset classes. But thanks to ETFs, it is now much easier for these investors to go long on gold . oil or gain exposure to corporate or government bonds .

Another aspect was getting international exposure to fixed income or foreign markets. Some of these companies did list shares on US exchanges as ADRs but I think its safe to say that ETFs have improved the scope of possibilities for small and even large investors and for that we should all be very thankful.

Targeted exposure

While there are thousands or mutual funds, many of them cover the same exposures. Every mutual fund issuer (there are hundreds) has a fund that covers the S&P500. Why? Because every adviser will generally recommend the funds issued by his firm or his affiliated firm. In the ETF world, you will rarely find more than a few ETFs that cover the same exposure. Even the S&P500 is covered by only a few ETFs.

What is very interesting is that ETF issuers are moving into new and very interesting areas. Not only can you get exposure to the Chinese equity market (FXI) but you also get exposure to the currency, small caps, large caps, Chinese technology stocks, industrial or other sectors. The possibilities are almost endless. That gives investors with very precise views to make investments on those specific scenarios.

Future of ETFs

It is unclear how ETFs will evolve but for now they certainly look like they will continue to gain assets and market share and will force mutual fund issuers to reduce their fees much further than what they have done up until now. I do expect investors to also start paying more attention to the fees they are paying through using mutual funds. It will take time but we will get there.