Mutual Fund Monday column, the head of retail marketing at fund giant
T. Rowe Price
weighed in on the battle between open-end mutual funds and exchange-traded funds. Alex Savich maintained that there is room for both investment vehicles to coexist peacefully in portfolios and that, despite all the hype, ETFs won't entirely replace traditional mutual funds any time soon.
hears from Sander Gerber, chairman of
, an asset manager whose stated mission is to "transform the way Americans invest" by guiding them into low-cost, tax-efficient portfolios of ETFs. Before managing money at XTF, Gerber mastered the intricacies of ETFs as a market maker on the floor of the
American Stock Exchange
Before we ring the bell to start round two, here's another look at the tale of the tape. Stock and bond mutual fund assets totaled $9.2 trillion dollars as of January, compared with just $315 billion for ETFs, according to the Investment Company Institute. However, the combined assets of ETFs grew 41% year-over-year in January, compared with a 15% jump for mutual funds. And the number of mutual funds, including money market funds, decreased 1% to 7,989 in January from 8,046 a year earlier. Meanwhile, the number of ETFs grew 35% over the same period to 205 from 152.
And there's the bell!
TheStreet.com: In your opinion, what are the biggest benefits of owning an ETF vs. a traditional open-end mutual fund?
: ETFs are transparent. That means that you know exactly what you get. At XTF, we analyze the holdings of every domestic ETF down to monitoring the actual withdrawal of cash for the expenses.
Furthermore, ETFs are low cost and extremely tax efficient. ETFs rarely pay a capital gain distribution -- this allows the investor to keep more money working in the investment, and also allows the investor to focus on aftertax returns. In fact, the granddaddy of ETFs, the
, paid a capital gain distribution only once -- that was 0.12% in 1996 -- and it was a mistake.
Are there any occasions when a traditional open-end fund would be preferable to an ETF?
Sure, mutual funds don't charge a transaction fee. So, if you are investing a small amount of money, you can put more money to work for you in a mutual fund.
XTF offers a brand of ETF-based portfolios that take into account market and economic conditions in order to create the optimal asset allocation. Could you explain your process?
At XTF, we believe that an investor will achieve best returns through a tax-efficient asset allocation. We then actively manage that allocation within certain bounds. Our portfolio begins with an asset allocation based upon mean-variance data. Our investment management committee then picks the best ETFs to map to those asset classes. Lastly, we increase and decrease the equity portion by plus or minus 20% based upon current forecasts. Thus, we combine the benefits of asset allocation based upon the past, with active management based upon the future.
What are the advantages in owning a portfolio solely composed of ETFs vs. a portfolio of eight to 10 traditional open-end funds? Any disadvantages?
At XTF, we want every investor to evaluate their investments by cost and after-tax returns, as well as their comfort to bear risk. We feel that the benefits of an ETF portfolio are low cost, tax efficiency, and transparency. However, there are some great mutual fund managers out there, if you can find them.
If actively managed ETFs ever make their way through the SEC and onto the market, how will this affect the battle between funds and ETFs? How will this affect your business?
AT XTF, we help the customer navigate the confusing array of ETFs to pick the best of breed. The more ETFs that are listed, the more important our job will become. The transparency of ETFs presents a stumbling block for actively managed ETFs because it could allow for the active manager to be "gamed" by savvy traders. This is one of the main issues that active ETF producers are grappling with.
Your mission is to "transform the way Americans invest," but most investors buy actively managed mutual funds in order to beat the market, not join it. Doesn't buying the index in the form of an ETF seem kind of "un-American" in a sense?
I believe that the SEC hasn't properly protected the American investor from faulty investment advertising. When a fund manager claims a 9% return over five years vs. a lower index return, many people are suckered to invest. In reality, such a claim is meaningless because it doesn't address taxation.
Taxation is one of the certainties of American life, and when you pay the government, your money is not being invested for you. Savvy investors know that after-tax return is what counts. At XTF, we want to get people focused on what they keep, not what they make, which is why we believe that ETFs should be a part of every portfolio.