Cheaper than mutual funds, $1Trillion+ invested in ETFs last year
Ric Edelman: Now let's shift over to the investment vehicle side of this. The most popular investment of the last 50 years has been mutual funds. I'll bet you own them. Most popular investment in the country, until lately. These days, it's ETFs that have become far more popular. More than $1 trillion invested into ETFs last year alone. Why the popularity? Well, for the reasons I've been telling you for, oh, a couple of decades here on this radio program, why are ETFs so much more popular now than mutual funds? Simple reason: they're cheaper.
You see, mutual funds in ETFs are both issued by the same companies. They invest with the same fund managers. They buy the same investments. Well, what's the difference between the two? Mutual funds were invented back in an era when Wall Street did business with paper and pen. ETFs were invented in an era of computer technology. So whereas a mutual fund trades once a day, you don't know the price of your shares until the market closes at 4:00, ETFs trade throughout the day, just like stocks do, so you have liquidity throughout the day. ETFs are also more transparent.
Why ETFs? Lower in cost, more tax efficient, and higher levels of liquidity
You know at all times what stocks are inside the ETF. With mutual funds, you don't know until six months later. It's out of date by the time you have that disclosure. And this is why I think it's fair to say pretty much every financial advisor I've ever met, prefers ETFs over mutual funds. But what about the $13 trillion that is still sitting in mutual funds? Why is that money still there? Well, I'll give you two answers. Number one, from the investors perspective, inertia. I mean, you've got your account, it's going fine. Everything's simple and easy and familiar. Leave it alone. Even though moving could be more beneficial to you: lower in cost, more tax efficient, greater transparency, higher levels of liquidity, It's a hassle to go through the process. So inertia is often something that takes over.
And the second reason, Wall Street makes more money selling mutual funds than they do ETFs. The expenses are higher, the fees they charge are higher. So Wall Street loves to sell mutual funds. Well, the movement is underway, and the most recent announcement comes from JPMorgan. They announced they're converting four of their mutual funds to ETFs, giving their investors the benefits lower cost, greater tax efficiency, better transparency. We're going to see over the next decade the elimination of mutual funds as everybody everywhere is in pretty much agreement, ETFs are simply a better format. It's just a better wrapper. No reason to be stuck with old mutual funds.