Mutual Funds versus Exchange Traded Funds

I was recently asked by a neighbor to comment on the suitability of a portfolio recommended by a financial advisor. The neighbors are in their early 60’s and relatively unsophisticated when it comes to investments. I never asked the size of their savings.

The couple are most concerned with preservation of capital with some income.

The recommendations consisted of 12 funds. Eleven were mutual funds with a concentration in the fixed income area. One was an ETF (VWO from Vanguard). As I researched the funds, I was surprised to find that three of them carried considerable front end loads-as high as 4.75%. The rationale given was that they were buying active management. An in depth look into the 11 mutual funds showed that they carried fees of between 80 and 190 BP annually. 100 BP on a $100,000 investment equates to $1,000 per year. I looked to find similar ETFs with close to the same risk exposure. In every case there was a comparable ETF (though not actively managed) that carried fees in the range of 15 to 60 BP annually. In addition to the fund fees, the RIA is charging 125 Basis Points to manage the account and more if he had discretion to make trades.

I recommended that the couple ask the Rep to try and find ETFs that fit the same criterion as the Mutual funds chosen. 

There are few active managed ETFs currently in the marketplace. PIMCO and Wisdom Tree having several. Charles Schwab recently announced a suite of actively managed ETFs and several more fund managers have plans. 

Key questions to ask your investment advisor:

Have actively managed funds out performed index funds over the short and long term?

Is there an ETF that matches the mutual fund being recommended, that has a dramatically lower fee structure?

What are you getting for a front end load?


7 Responses to “Mutual Funds versus Exchange Traded Funds”

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