Why Exchange-Traded Funds May Be An Investor's New Best Friend
Passive Beats Active on Costs
|Category||Expense Ratio (Avg.)||Cheapest Index Fund||Cheapest ETF|
|Large Cap Blend||1.13%||0.07%||0.07%|
|Small Cap Blend||1.43%||0.14%||0.20%|
Buy side firms, Wall Street’s parlance for mutual fund managers, are now more focused on cost cutting than alpha generation, according to one trader. One way to lower costs is to trade less, a move that could hasten a massive shift of assets out of the active camp.
“Just their fee structure is enough to scare an active manager,’’ says Mike Cavanaugh of the cost advantage enjoyed by passive funds. Cavanaugh runs the Chicago registered investment advisor Know Your Options.
While active funds that adhere to a specific style or market cap have a tough time keeping up with index funds and ETFs, go-anywhere funds not restricted in what they can buy have tended to fare better. Luschini says funds likeFirst Eagle Global(SGENX), BlackRock Global Allocation, and IVA Worldwide still stand out due to their active approach.
Active funds as a whole should benefit when normalcy returns to the markets and the economy. In a more stable environment, correlations decline and stock picking matters.
But with the Fed poised to unleash another round of quantitative easing, normalcy still appears a long ways off. In the meantime, investors would be well-served to keep a lid on costs and let the high frequency traders set prices by investing through ETFs and index funds.