The growing similarities between ETFs and mutual funds

Posted by on May 12, 2010 in Investment Products

Hozizon Alpha Pro is offering a product called the S&P/TSX 60 130/30 Strategy Index which is basically an exchange traded fund (ETF) which tracks the TSX 60 but with an overweight in 10 stocks and an underweight in 10 stocks (trades under the symbol TSX: HAH). In other words, this is an ETF tracking broad based Canadian equities index with an active management feature to it at a MER of 0.95%- high for a ETF but low for a mutual fund. Or, to look at this another way, this product is basically a closet index equities mutual fund with lower fees.

While the product may have been designed as a mutual fund killer, its potentially positive effects in eroding one product, mutual funds, may be partially cancelled out on its potentially negative effects on another sector, the ETF.

Some time ago, I started accusing the ETF industry of catching mutual fund-itis. The disease is the Wall Street disease of more- more product, more fees, more greed. As with any financial product, there appears to be a direct correlation between its popularity and crappy product. Triple leveraged ETFs, ETF tracking small niches, actively managed ETFs are variations of product that have brought nothing but noise over the initial advantages of the product- broad coverage, low fees, easy liquidity. No wonder ETFs are starting to scare financial planners.

I suspect part of the problem is the blogging community itself. We have often used ETF as short-hand for broad coverage and low fee fund tracking an index which trades on the stock market (unlike mutual funds which are sold back the issuer). The financial industry has been quick to pick up on the simplistic analysis of ETF = good, mutual fund = bad and used it as a marketing tool. ETFs and mutual funds are neither good or bad. In and of themselves, they are just types of products. How it is designed becomes key rather than the concept itself.

There has been such an overlap between certain ETFs and mutual funds that it is too simplistic to say “I want to invest in an ETF.” Instead, the analysis should start with “what type of equities and fixed income exposure do I want,” which is a strategic question, as opposed to “what about this ETF,” which is a tacticial/product question and the type of question that plays right into the financial industry’s hands.

As always, the deeper one digs into the analysis, the better off one is. Canadian Couch Potato would be an excellent start for anyone who wants to understand the ETF industry better.

As for HAH, the mutual fund industry is hardly quaking in its boots. The average daily volume of the product is 2,000 shares.

4 Comments on The growing similarities between ETFs and mutual funds

By Balance Junkie on May 12, 2010 at 9:15 am

I’ve been concerned for a while now that the financial services industry would gradually ruin a good thing. ETF advantages include simplicity, liquidity, and low costs. It seems all of these are being eroded lately.

By Canadian Couch Potato on May 12, 2010 at 3:00 pm

Excellent post, TMY, and thanks for the mention.

The indexing strategy is based on investing in major asset classes using passively managed funds that track broad-based indexes at low cost. There was a time when almost all ETFs fit that description. But today most of them don’t: many are narrowly focused on one sector, employ active strategies, or are just too expensive. Stick with the proven performers and resist the marketing hype.

By Tweets that mention Thicken My Wallet » Blog Archive » The growing similarities between ETFs and mutual funds -- Topsy.com on May 14, 2010 at 1:01 pm

[...] This post was mentioned on Twitter by Buy-Sell Adviser, 2 Cents. 2 Cents said: RT @BuySellAdviser: Low fees have helped make #ETFs popular, but what if they start turning into 'closet' mutual funds? http://bit.ly/cGVnMo [...]

By Ways To Save Extra Money and How To Sell Your Used Car Online on May 21, 2010 at 5:21 am

[...] Thicken My Wallet compares the growing similarities between ETFs and mutual funds. [...]

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