Will ETFs kill the mutua fund business?

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Mar 12, 2006 5:29 pm

What does everybody think about this? I lost out on a $500K rollover last week to some guys that are dumping the whole thing into a ETF portfolio and charging 50 bps to actively rebalance.



The client showed me their stuff and said it all got down to cost. He was convinced by these guys that a mutual fund charging 85 bps is at a disadvantage against just buying the underlying benchmark through an ETF. He ended up with 15 ETF and a handful of TZs.



It is hard for me to argue against the math. Do you all have any ideas?   What kind of ETFs programs are out there and what kind of charges are you seeing?



Thanks



Roger and Out!

Mar 13, 2006 12:26 am

I you want to scare them....maybe tell them that they could trade at a
discount to whatever index they represent.  Tell them that if they
trade at a discount, they will get less than what the securities in the
ETF basket represent (of course they could also trade at a premium).



With an open ended mutual index fund, you will always be able to sell at the NAV of the fund. 



The best place that I have found to go for ETFs has been

http://www.amex.com

and click on the ETFs or HOLDERS link on the left hand side of the page. 



Where I work, I see a lot of people putting their money into the ETFs
than mutual funds.  Of course the mutual fund industry will not
die IMO becuase we all have to put our 401k assets in open ended mutual
funds while we are working...

Mar 13, 2006 7:31 am
Romperman:

What does everybody think about this? I lost out on a $500K rollover last week to some guys that are dumping the whole thing into a ETF portfolio and charging 50 bps to actively rebalance.

The client showed me their stuff and said it all got down to cost. He was convinced by these guys that a mutual fund charging 85 bps is at a disadvantage against just buying the underlying benchmark through an ETF. He ended up with 15 ETF and a handful of TZs.

It is hard for me to argue against the math. Do you all have any ideas?   What kind of ETFs programs are out there and what kind of charges are you seeing?

Thanks

Roger and Out!


I agree with the other guys. Why not join them in doing that kind of business for clients that want it?

Mar 13, 2006 8:40 am

I like the ETF approach and have been 'flirting' with making the change.  my issue is that the minimum that i know of internally i can charge is 100bp

Mar 13, 2006 10:19 am

Go here http://www.etfconnect.com/   and research the various ETFs available.   Check out the trading volume on some them.  It is really skinny


In addition to trading at a discount, (good when you are buying not so good if you are selling).  Many ETFs are not as liquid as mutual funds.  When I buy or sell these I always stress that we may not  to be able to sell large blocks in a single transaction and that we should place buy limit or sell stop orders to avoid trading at an unacceptable price.


I would never put all of one person's portfolio in ETFs for the above reasons.  But I do use them extensively in my practice.

Mar 13, 2006 11:02 am

I would tell him to ask them to provide a track record of their trades. Ask them how they decide which sectors or indexes to allocate to. Ask them how much money they manage, and their tenure in the business. Then show him your mutual fund (which has a great track record even AFTER expenses, show him the multiple managers with an average tenure of 20 years,supported by over 150 research analysts, who have been through markets both good and bad, who play defense for client money, not just offense like your competition is proposing.Show him that the firm manages BILLIONS  in client assets for Millions of clients.What is the support for your etf guys? There's only one factor that determines whether your client will achieve his goals, and it's not saving 30 basis points a year. Is saving 1/3 of a percent worth risking a 50% loss or more with your etf guys?



BTW, I have some client money in etf's, but it's not the entire solution.


Good luck


Stok

Mar 13, 2006 12:39 pm

I use ETFs frequently.  My fee is 1.5% and I activly manage them by tracking each sector I follow monthly.  I track 28 international and 25 domestic ETFs using technical analysis to determine buy hold and sells each month.  With ETFs I can use stops which I love as do my clients and it puts me in the drivers seat verses some MFD manager.


I think it also makes my clients more sticky because they know it is me doing the work for them and we can really attack sectors that are doing well.  Also, after 2000 and 2001 I dont know how anyone can say mutual funds are good at protecting clients money.  Just my opinion, sorry you lost the account.

Mar 13, 2006 1:17 pm

Malcom, honestly, how has your performance been using this technique?

Mar 13, 2006 3:30 pm

Net of fees, if a client was invested from 1/1/05 they were up 15.4% last year.  YTD they are up 3.6%.  I also add GLD to my ETF accounts which has represented up to 12% of the account values.


My clients are happy with the returns however my big thing is not loosing money so one of the things they like best is the use of stop losses and getting rid of the "ride market cycles out" mentality.  I will sell on an absolute basis or using technicals.  If it breaks the 200 day I am out no matter what.  Some of the int'l ETF have done especially well however we have taken some hits lately. 


I have also been riding the Russell 2000 as my biggest holding right or wrong so I watch that real close not only as a market barameter but because it is our largest % holding.  Intl is 20%    

Mar 13, 2006 9:14 pm

It is impossible for ETFs to trade at any significant discount or premium for long -becuase the arb bots will pounce on them, since ETFs are opened ended mutual funds. Some of you boys are confusing ETFs with closed -end funds a big difference. Go ahead check my math!



Also I know of several 401(k) plans that do not use opened ended funds - in fact that is just a myth that the opened end fund guys created. Check out ATT 401k for an example, also the Federal Govt employees. NO Mutual Funds in those plans.



And let me remind y'all that no matter how many millions are spent on research and no matter how many suckers have bought opened ended funds there remains no correlation to future performance.   The big American Funds are basically overcharged index funds - statistically impossible for them to outperform their benchmarks. They know this - unfortunately some of you schmucks out their want to believe the myth that research makes a difference, hell just buy the large cap growth ETF that MStar has out now for 20 bps. Then read the American Fund prospectus that says in black and white that past performance is not indictative of future results. There is no such thing as professional money managers, only professional marketers.



Active asset allocaters could be right or wrong - again past performance is not indictative of future results. Overweight in the wrong area -BAM!



Mutual funds are the biggest scam ever pulled off on the American public. The clowns that sell them are salesman sucked into the scheme.



I suspect Stockwiz has had a good dose of Jones Juice, it sounds like he is all goofy. That kind of talk sounds good, until somebody in the audiance knows what they are talkin about then you look like a fool boy. Go ask any finance professor what he thinks of your story! He will start laughin~!

Mar 14, 2006 11:11 am

That's great Lance.  I feel just the same although I suger coated what you came right out and said.  THose stories are great when you have a uninformed tine client with 10k to invest sitting in front of you.  Try that crap on a wealthy smart guy and see what happens.


I'm riding today at 3:00.  Ye haaa  Malcolm out


Mar 14, 2006 11:25 am

Actually, I've been independent for over 12 years, in the industry for 17. I believe the original post was for our friend Romperman who is looking for ideas to win over business, non of which I could find in your post. If you replace the word mutual fund in your post with etf's, it would make no difference. Picking etf's in a rising market is a brainless exercise.  How would a client be better served in a down market- In the hands of managers with decades of experience and who watch the markets all day , or in the hands of someone as  immature as lance legstrong? By the way, does your checking account outperform the market? Of course not. As you mature in this industry, you'll find that most clients aren't concern with "outperforming the index". Also,true licensed professionals know that asking a college professor (who are 99% liberal)about real world strategies for achieving wealth is akin to asking our poster lance weakleg about wealth management- Laughable.


Stok

Mar 14, 2006 11:31 am

Ha ha that is awesome.....


Good feedback

Mar 14, 2006 11:49 am

It is impossible for ETFs to trade at any significant discount or premium for long -becuase the arb bots will pounce on them, since ETFs are opened ended mutual funds. Some of you boys are confusing ETFs with closed -end funds a big difference. Go ahead check my math!


You are correct.  I was referring to exchange traded closed end funds when discussing the discount to NAV.  I am not a fan of buying indexes, especially the S&P or the Dow as I think they are too narrow in focus.  If you bought the index from 2000 to 2003 you are still trying to get back to square one.  However, I do like some of the sector plays in indexing.  

Mar 14, 2006 1:19 pm

Stockwiz you make be laugh your righteous neo-con clown!


There is no correlation or evidence whatsover that "experienced" managers do better than their benchmarks regardless of the market conditions!


And by the way my checking account did out perform most indexes and most managers 2000-2002


Clients are concerned that they are overpayin' clowns like you who can not do better than the market.  What exactly do you do for your clients besides conning them out of their cash based on some myth that you were taught to believe in!


The number of uninformed people is shrinking and these ETFs are forcing the light to shine on the excessive fees charged by the funds. How can anyone make a serious argument that Investment Compnay of American (80 bps) can outperform its benchmark -  S&P 500 Value (IVE) ETF (20 bps). Sure it might, but that doesn't mean it will!


It doesn't take a liberal to laugh at that argument.  


Now go back and tell yourself how smart and conservative you are and how you deserve that cash that comes out of your clients pockets through the mutual fund fleecing schemes that you depend on!.



Mar 14, 2006 1:44 pm
Lance Legstrong:

And by the way my checking account did out perform most indexes and most managers 2000-2002


Yet another one who thinks the S&P 500 sums up the universe of indexes and knows even less about active management.

Mar 14, 2006 1:46 pm
mikebutler222:
Lance Legstrong:

And by the way my checking account did out perform most indexes and most managers 2000-2002


Yet another one who thinks the S&P 500 sums up the universe of indexes and knows even less about active management.




Hmmm, that was too harsh. It would be better to say that Lance's comment suggests he's new to the business and too deeply in love with the extreme version of MPT.

Mar 14, 2006 2:01 pm
Romperman:

What does everybody think about this? I lost out on a $500K rollover last week to some guys that are dumping the whole thing into a ETF portfolio and charging 50 bps to actively rebalance.

The client showed me their stuff and said it all got down to cost. He was convinced by these guys that a mutual fund charging 85 bps is at a disadvantage against just buying the underlying benchmark through an ETF. He ended up with 15 ETF and a handful of TZs.

It is hard for me to argue against the math. Do you all have any ideas?   What kind of ETFs programs are out there and what kind of charges are you seeing?

Thanks

Roger and Out!


Yet one more example of the the cost tail wagging the investment dog. Stok gives good advise on a future track to take when confronted with situation. It ain't all about cost. If it was we'd all be driving trucks for JB Hunt rather than dispensing investment advise.


Mostly, from what your saying, it sounds like the other team did a better sales job than you did. Nothing wrong with that, it happens to us all. Learn from it.


If you can't beat'em on price it's time to start asking some disturbing questions. Start with:


Do you know how much risk you are taking with that plan?


Is this the kind of risk you want to expose your retirement assets to?


You are aware that ETFs are relatively new investment vehicles and don't have the long term track record of mutual funds or other investments. You can't afford to lose your retirement money, are you comfortable with this?


Before the ETF police jump on me I have nothing against ETFs and like everyone else I use them in my practice. However, If I had determined that for a particular client they were not the best way to go and found myself selling against competion that was going the ETF route you can bet I'd pull out my copy of "1000 reasons not to invest in ETFs" and club the client with it. I'd mark reason 343, ETFs give you cancer. I'd make sure that the client understands what risks are being taken and then show how those risks are not in line with his investment goals and temperment.












Mar 14, 2006 6:13 pm

TJ all of those "reasons not buy an ETF" will get you laughed out of the room with sophisticated money.


All I am saying that a client can set up a very prudent risk adverse portfolio using ETFs and avoid the cost structure of a conventional mutual funds.  99% of the risk/return is going to be in allocation not from a manager.  


Of course if your sales tactic is to make stuff up and lie to the client - then maybe you should be driving a truck. 


Besides CDs and Treasury Bonds the only thing certain about any investment program is the cost/expenses that begin to acrue tomorrow.  Can anyone care to dispute the math on this concept?


The reality is that the light is beginning to shine on all of these excessive fees that mutual funds charge and that might indeed put some of you fellas behind the wheel of a truck where you belong!


What is really funny when I see some clown do a mutual fund comparison and reccomendation for a client or prospect. Again - past performance is not a indication of future results!   Why don't you just get out a voodoo doll and your crystal ball - the math is the same! 


Mar 14, 2006 6:47 pm

lance legstrong,


If you expect to be taken seriously on this forum, I suggest you not use emoticons in the same post as "sophisticated money'', whatever you may think that is. I suggest you not continue to make reference to mutual funds and past performance is no guarantee of future results, as if that doesn't apply to etf's. 


You make reference to costs to the client- how are you compensated with etf's? probably with a wrap fee of 1 point or better, so there goes your cost comparison.


I think you must work for the circus, as you apparently witness alot of clowns writing business.


Romperman, I believe I've found the one who has been talking to your prospect, and I recommend you call him back asap, as lance legstrong would be no challenge in a battle of wits, or in negotiation for accounts.


Stok