The Mutual Fund Rip Off is Finally Ending

madhedgefundtrader's picture

Exchange traded funds (ETF’s) could soon replace traditional mutual funds as the primary investment vehicle for individuals because of the huge cost, tax, and liquidity advantages they offer. That’s the opinion of Tom Lydon, publisher of , a snappily designed site that I constantly refer to on all things related to this highly efficient trading instrument.

Tom’s site offers updates on new ETF launches, research tools, and a free newsletter presenting a half dozen investment ideas a day. He finds ETF’s so attractive that he has converted his own management practice for high net worth individuals at from one focused on mutual funds, to an ETF orientation.

ETF’s enable rifle shots at specific countries, industries, currencies, and commodities on the cheap without having to wade through a morass of complicated settlement details. You can buy ETF’s on 50% margin, go short, and with the larger ones, like the S&P 500 (SPY), deal with only a penny spread, plus a token commission.

The ETF industry has exploded since the March bounce, and there are now 836 such instruments issued by 35 providers with a total market capitalization of $782 billion. Recently, the first ETF’s for platinum (PPLT) and palladium (PALL) were launched. Some have grown so large they have become major influences on the market for their underlying commodities. The one for gold (GLD) has $40 billion in assets, making it the world’s fifth largest holder of the yellow metal.

The bigger ETF’s are now resorting to swaps to sidestep CFTC position limits on options and futures contracts. Since most of the current ETF’s mimic indexes, daily buying and selling is minimized, creating fewer taxable events for American investors. Low turnover also helps keep operating expenses down. These quasi index funds confined to narrow groups of stocks can offer better liquidity than any single security. Individual investors can’t put ETF’s into their 401k yet, but that is expected to change soon.

 More controversial are the leveraged ETF’s, like the TBT offering 200% and 300% long and short exposure, which because of their heavy cost of carry, can diverge substantially from their underlying markets. Better to use these only as short term trading vehicles. Other strategies generating debate are funds of funds holding ETF’s with much higher cost structures, and actively managed ETF’s, which cede their index qualities, for better or for worse. Hedge fund ETF’s can’t be far behind.

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, 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 than 90% of all mutual fund managers reliably underperform the indexes, some grotesquely so.  Published performance is bogus, as 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 ever an industry crying out for restructuring, consolidation, and 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. Still, it’s  early days, with ETF’s only accounting for 5-6% of trading volume, even though they have been around for a decade.

ETF maven Tom Lydon’s favorite ETF’s include the ones for emerging markets (EEM), (VWO) and (EEG), gold (GLD), silver (SLV), and technology (QQQQ) and (XLK). No great surprise that these are the funds seeing the biggest investor cash inflows. They also happen to nicely mesh my own view of the world. 

I wish they had invented these things 40 years ago. It would have made my life so much easier. The potential performance of a Japanese small cap ETF bought in 1969, a gold ETF launched in 1971, or a Chinese technology ETF investment in 1978 would have been positively exponential.

To listen to my complete interview with Tom Lydon, please go to the Hedge Fund Radio page at my website by clicking here at




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sun1's picture

I have to admit that I have never heard about this information I have noticed many new facts for me. Thanks a lot for sharing this useful and attractive information and I will be waiting for other interesting posts from you in the nearest future.keep it up. click here to get a quote

Anonymous's picture

this article is non-sense. There are many open ended funds that have beaten the market and have reasonable fees. ETF's are normally focused on one sector or area so these probably are not good for retail investors since they usually buy at the top anyway. A good open end fund mgr will not get caught up in the hype sectors and will outperform the market.

Anonymous's picture

I think ETF's are a waste of time, the leveraged ETF's rebalance on a daily basis and do not accurately track the indices they purport to accelerate -- SKF anyone. Why pay a fee to buy an ETF that tracks certain stocks when you can buy those stocks directly without a fee. ETF's are the reason we can't bring back an uptick rule, because there is no way to have an uptick in the underlying stocks.

Anonymous's picture

Are you and Tom buds?

Anonymous's picture

"Individual investors can’t put ETF’s into their 401k yet, but that is expected to change soon."

Actually they can in some cases. Spouse's company has Schwab for the 401k, and you can have a self-directed brokerage acct within it. And you can trade ETFs within it, including the leveraged ones. It's a great option for the more experienced investor.

shinola's picture

Cramer, izzat you moonlighting as MHFT?

Mr Lennon Hendrix's picture

SLV marks the spot ;)

ghostfaceinvestah's picture

The only thing keeping the mutual fund industry going today is the limited 401k selections available to most Americans.

Folks, do yourself a favor and see if you can get a self-directed option on your 401k, no, better yet, demand it, it is your fucking money, so you can break out of the mutual fund deathtrap.

Anonymous's picture

Once again "madhedgefundtrader" is looking for attention. There is no possible way this tool thinks that this article is useful, interesting, or insightful to those who frequent ZH. This is appropriate for USA Today. Once again, please go away...perhaps you could get a pet and read your articles to them for the attention you seek. You truly are pathetic.

i.knoknot's picture

while slightly below the usual ZH level (probably written for SA as well), this was a simple and useful article to many.

some of you folks need to relax a bit, and let down your "i already knew all of this so i'll tell the world this sucks" guard. get some self-esteem... if its below you... just *quietly* move on to something more chewy.

tnx mhft. good summary, although i already knew all of this... :^)

BTW - i'm with the GLD/SLV commenter above. i think they're both evil. kind of like buying 'made in china' at wal-mart... solves my immediate need, but has an imbedded long term cost/risk that probably makes it a bad idea. i'd wager gld and ft knox are close cousins: both mostly empty or mostly tungsten. ironic that most gld buyers are using it as an inflation hedge, and it's highly likely that its entire existence is inflating the gold market itself. the PTB must just get a giggle from this kind of stuff.


Chopshop's picture

very well said, i.knoknot.

good piece, MHFT. thanks for it.

Anonymous's picture

There are still a lot of people dollar cost averaging into mutual funds. Only about 5 to ten percent of the investor class can really benefit from ETF's. For people with less than 10,000 at a time to invest (let's say 1000 month) they would probably come out the same buying a vanguard index fund. Also you can instantly diversify even with a contribution of a few hundred dollars a month (world index minus USA for example or total world index). The total costs are actually higher for dollar cost averaging into ETF's than into a low cost diversified index fund, because you have a transaction cost for each etf purchase that only makes financial sense if you are a high net worth investor and not a typical 401k or IRA contributor.

RowdyRoddyPiper's picture

This isn't exactly news for anyone who has followed the investment industry for the last, say, 5 years. Once Barclays came out with Ishares, the end was beginning for the mutual fund industry. Here in Canada the mutuals have one advantage over ETFs and that is their availability. MF's can be sold directly by the MF companies, and through a wide range of sales networks. ETFs have to be purchased via a securities broker who has barriers in place to stop smaller investors from opening accounts. ie High fees. If you don't allow the broker to churn, you can't play.  Is it any wonder, therefore, that the major securities firms in Canada are owned by banks?

TraderMark's picture

well the next big move is actively managed ETFs


so we're basically back where we started

i.knoknot's picture

aren't the ETFs more liquid in their usual treatment as a stock-like vehicle, rather than having to wait for the end-of-day settling price to buy or sell, etc.?

maybe this only matters to a small number of 'traders', but being able to have limits/stops on these vehicles is pretty handy.

i'm probably wrong, but ETFs feel slightly closer to the markets they cover, than the monolithic MFs with all of their layers.


Anonymous's picture

Really? Because my present take on both mutual funds AND ETFs is that they both suck.

Daedal's picture

ETF maven Tom Lydon’s favorite ETF’s include --gold (GLD), silver (SLV)--No great surprise that these are the funds seeing the biggest investor cash inflows. They also happen to nicely mesh my own view of the world. 

What world view is that, investing without due dilligence?

ShankyS's picture

It was obvious in the early '00's that ETF's would take over. And the ratio of fund managers outperforming their index is? I'm not into paying up for low Alpha. Sure, some perform well and serve a purpose that ETF's can not replace, but the tide is turning. Either provide the Alpha that is desired or die.

Anonymous's picture

This is absurd. There are good open-end mutual funds and bad ones, and good ETF's and bad ETF's.

And there are a bunch of new ways to lose with ETF's that aren't possible with good open-end mutual funds.

Missing_Link's picture

Your equivocation is mere obfuscation.

Madhedge is correctly pointing out that for any given index, portfolio, or strategy, a mutual fund will nearly always underperform an ETF targeting the same index, portfolio, or strategy.  Mutual funds carry massive baggage (and quite often, incompetence) that ETFs do not.

Yes, of course you can shoot yourself in the foot with an ETF.  That's true with any financial instrument.  Both have some distribution over time.  Yes, you can always point to cases where mutual fund X beat ETF Y, but his point (and Tom Lydon's) is that mutual funds have a distribution of annual returns that's shifted downwards relative to ETFs due to their structure, their overhead, and their mediocre management.  I think even the smallest bit of research will prove that beyond a shadow of a doubt.

Ripped Chunk's picture

The MF industry has been a bloated hog badly in need of slaughter for well over 10 years.

Growth of IRA/401k has benefitted no one but these gluttonous pigs.


mnevins2's picture

And don't forget the greatest fraud of all: Variable Annuities!!!

It makes the regular mutual funds look like saints  - where they take a high-fee MF and merge with a high-fee life insurance product!!!

Anonymous's picture

Of course the next phase is a manager of ETF's....

Management funds reinvented....


Actually "Management" itself should just trade as a $10 stock....instead of a fund....

Then "Management" could be quickly perused by the buyer....or seller....

Short selling a "Bad manager" could be interesting....