While mutual funds may still dominate the U.S. market, ETFs are gaining traction quickly. According to the 2019 Investment Company Institute Factbook, at the end of 2018, the U.S. domestic mutual funds market amounted to $17.7 trillion in total net assets. At the end of 2018, US domestic ETFs had $3.4 trillion in total net assets, which is double the assets in ETFs from just five years ago. Index domestic equity ETFs are attracting one and a half times the net inflows of index domestic equity mutual funds since 2009. Clearly, ETFs have become very popular investments in a rather short period of time and are continuing to grow.
But if an investment manager can replicate the same strategy with the non-transparency of a mutual fund but get better performance because of the lower costs by using an ETF chassis, why ever use a 40 Act mutual fund chassis? The short answer to that is one size does not fit all.
In other words, depending on who the investor is, there are pros and cons to owning ETFs just like there are with owning a mutual fund. These pros and cons need to be broken out between the two major types of account holders to better understand the pros and cons of investing in an ETF. Those two major types of account holders would be those invested in tax-deferred retirement accounts, like a 401(k) plan, and those holding investments in some type of taxable retail brokerage account.
I recently wrote a piece about this very topic for ThinkAdvisor. You can read the whole piece here.
