Mutual Funds Gain Ground on ETF 'Fad'

NEW YORK ( TheStreet) -- While the $1.1 trillion exchange traded fund industry has been gaining in popularity, especially with younger investors, many industry professionals agree that it will never replace the mutual fund.

"Mutual funds showed some decline in the last months and ETFs have grown in a faster pace in the last month, but they are certainly not dead," said Pamela Carello DeBolt, a senior analyst at Cerulli Associates. "ETFs are growing they will not be able to keep the explosive pace that they have over the next couple years."

Mutual funds are in no way being depleted, said Vanguard ( VTI) founder John Bogle. While Bogle admits that the ETF has gained in popularity, he believes that the latest rise in ETF investing won't stick around long.

It's, in fact, more of a fad, he argues.

"It's not going to do well because investors chase fast returns. It is not a business where you should trade all the time, and ETFs are designed to have you trade," said Bogle. "I think eventually investors will figure that out and will come to a more centrist strategy, particularly with respect to all of the crazy ETFs that exist out there. "

Younger investors prefer ETFs because they are more user-friendly and transparent in the uncertain economic environment, said Lawrence Golub, president of Golub Capital ( GBDC). He adds that ETFs also provide a greater degree of options especially for investors that actively manage them.

"There is more of a generational development with ETFs," Golub said. "ETF shares are marginal or if you want to you can borrow against security holdings to hedge your investments."

The ability for investors to transact during the day is one of the main reasons ETF popularity has grown, said Sean Crawford, a portfolio manager at Barclays Wealth ( BCS).

"ETFs are great for tactical and narrow trading ideas that are strategic. We run an ETF portfolio with very narrow trades. It is more of a way of expressing a more defined opinion," said Crawford. "I don't think they will kill mutual funds. ETFs are good at replicating the performance of the S&P 500."

Another reason the popularity of ETFs has increased is because of the uncertainty in the market is causing investors to look for more diversity in their portfolios, DeBolt argues.

"We saw money coming into equity mutual funds in the past couple months. There is still a lot of uncertainty around the markets right now," said DeBolt. "Investors are looking for diversification and safe haven. So we have seen a rise in ETFs and alternative mutual funds, which use derivatives or options."

Investors are also turning to annuities and limited partnerships, especially for investments in commodities.

"Limited partnerships are more efficient from a tax perspective than both ETFs and mutual funds," explains Crawford.

Bogle argues that while annuities should be great for investing, most of them are overpriced at the moment. He says that by far the most popular products are the mutual fund and ETFs, but that won't stick for long.

"I think the speculative funds and speculative ETFs will gradually start to die and the long term investment mutual funds like the total stock market index will be around forever," said Bogle. "My experience is that if you have a hot product avoid it like the plague."

--Written by Maria Woehr in New York.

To contact the writer of this article, click here: Maria Woehr.

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