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The Death of the Mutual Fund
Many hedge fund traders are unhappy about the current near monopoly enjoyed by the top three ETF issuers, Black Rock, State Street, and Vanguard, which control 83% of the market. At last count more than 1,100 ETF’s were capitalized at more than $1 trillion. The result has been grasping management fees, exorbitant expense ratios, and poor structural designs which create massive tracking error.
The good news is that new entrants are flooding into the ETF space, and the heightened competition they are bringing will help curtail the worst of these abuses. This development will accelerate the demise of the bloated and arthritic mutual fund industry, whose end has been a long time in coming.
Not only will management fees and expense ratios plunge, there will be a far broader range of offerings, as new funds are launched from a diverse range of institutions coming from differing areas of expertise. Failure to enter the newly lucrative ETF market by the remaining giants sitting on the sidelines means that their existing mutual fund businesses will be cannibalized.
Look no further than bond giant PIMCO, which is coming out with a plethora of fixed income related funds, Van Eck’s expanding list of ETF’s for commodities, and the even growing list of inverse and leveraged inverse ETF’s presented by ProShares. The bottom line will be that lower costs and tighter spreads will leave more profits on the table for the rest of us.
ETF’s are much more attractive than mutual fund competitors, with their notoriously bloated expenses and spendthrift marketing costs. You can’t miss those glitzy, overproduced, big budget ads on TV for a multitude of mutual fund families. You know, the ones with the senior couple holding hands walking down the beach into the sunset, the raging bulls, etc? You are the sucker who is paying for these. Sometimes I confuse them for Viagra commercials.
I once did a comprehensive audit on a mutual fund, and a blacker hole you never saw. There were so many conflicts of interest it would have done Bernie Madoff proud. Any trainee assistant trader can tell you that more 90% of all mutual fund managers reliably underperform the indexes, some grotesquely so. Published performance is bogus, they show a huge survivor bias, not including the hundreds of mutual funds that close each year. And there’s always that surprise tax bill at the end of the year.
If there was every an industry crying out for a fundamental restructuring, consolidation, price competition, and ultimately a whopping great downsizing, it is the US mutual fund industry. ETF’s may be the accelerant that ignited this epochal sea change, with the number of mutual funds recently having shrunk from 10,000 to 8,000. It’s still early days, with ETF’s only accounting for 5-6% of trading volume, even though they have been around for a decade.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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"At last count more than 1,100 ETF’s were capitalized at more than $1 trillion"
^^^ Is that correct? That's 1.1 QUADRILLION dollars. I know we need to get used to seeing this kind of number, but that seems high.
What is the size of the MF capital market relative to other fund markets, (PF, HF, SF, CF), operating in the US market?
Mutual Funds are so 1990s. I haven't bought one in years.
Good article!
What a one sided article, not a mention of how ETF's are highly illiquid, how they were the bulk of the crashes and blow up's during the Flash Crash, how the Ultra ETF's don't perform or track what their prospectus says. How ETF's are the sole reasons HFT exists, The Fact that the likes of Black Rock are involved in ETF's creation is a reason to sit on the sidelines IMHO.
Agree Irieblue. Just because it’s an ETF doesn’t make the underlying investment a good one, or any more transparent. Look at USO and many other commodity ETF’s; probably some of the worst investments in the entire industry. Does anyone even have a clue as to the position mix or the fees and commissions that go out to USO’s brokers and trading partners? Not me. What I can see clearly is that this fund has grossly underperformed the prompt month oil futures price index, which is presumably what it is supposed to mirror.
I’ve always viewed ETF’s as mutual funds that simply trade in real time, which are easily as opaque as the mutual funds behind them. I think that’s the real motive of ETF creators; more transactions, trading margins for market makers, and commissions for their brokers and exchanges that list them. It’s mostly a marketing gimmick.
No argument on your observations, but I think that the gist of MHFT point is the Index and sector ETFs are going to eat the MF's lunch. If you want Emerging Markets, EEM vs some generic actively managed fund is a no brainer. Likewise EFA vs most international funds. Compare GDX vs FSAGX or the Vanguard equiv..
For the bulk of 401-K and IRA investing, which is buy and hold and DCA, ETFs have advantages.... (Not that I think either of those strategies is a long term win for the average schmoe....)
What kind of conflicts of interest? I have wondered for years exactly why the typical fund underperforms the market. Until now I thought it was incompetence.
yes...praytell, motives are important to truely undertanding behavior...moar mad hedge
MHFT,
Good article....states the obvious though.
I'm waiting for the elderly couple sitting in the bath tubs comparing their fund families.... Nice one..
You like to claim you like to stay on top of trends, we should discuss Net Oil Exports....
more sales to rip off the suckers, hehehe.
http://covert2.wordpress.com
Agree with u Mad...
ETFs the future
But how to tell The Parents...