ETF vs. Mutual Fund Debate Comes to a Close

BOSTON (TheStreet) -- In the competition between mutual funds and exchange traded funds, investors are often persuaded to buy one over the other. It shouldn't be that simple for individual investors, says Doug Kreps, managing director of Fort Pitt Capital Group.

"The good and bad of Wall Street is that it will invent any product to fit any perceived need in the marketplace," Kreps says from his office in Pittsburgh. "The challenge for investors is figuring out which product they truly need."

But even with his plea for sanity in the mutual fund versus ETF debate, Kreps has his own preferences. He has seen new business come into his firm that included several portfolios containing highly specialized exchange traded funds, or ETFs. He wasted no time in swapping out of those investments.

"For these clients, owning ETFs was more of a momentum play. It was a trading strategy, not an investing strategy," Kreps says. "We've converted those clients, and they're happy now."

And so begins the latest volley in the war of words between proponents of mutual funds and ETFs, a debate that has become Wall Street's own version of the Hatfields and McCoys. In one corner are those who disdain the bloated fees of mutual funds, bemoaning the lack of transparency, the "style drift" of portfolio managers and the chronic underperformance compared with stated benchmarks. In the other corner are those who say ETFs are a risky trading vehicle, not a strategy, misused by investors who come to Wall Street as if to enter a Vegas casino.

ETFs have become a cheap and popular way to diversify or hedge positions. Despite the fever-pitch demand, ETFs still lag well behind mutual funds in terms of assets.

The combined assets of U.S. mutual funds totaled $12.1 trillion in March, according to the Investment Company Institute's official survey of the mutual fund industry, while the combined ETF assets were about $1.1 trillion. This isn't an apples-to-apples comparison, considering that ETFs have been kept out of 401(k) accounts.