Ms Perryman observes that ETFs and index funds can offer overlapping exposures at times. “It is fair to say that ETF product development has gone further and been more innovative than index mutual funds offering a broader range of market exposures,” she remarks.
“This can be visible across a number of asset classes, such as fixed income where innovations like passively managed emerging market local currency debt or global convertible bond exposures came through ETFs first.”
She continues: “Overall, the two types of vehicle co-habit in the product range space to meet different investor needs. They are both indexed exposures but will be bought, sold and traded differently.”
There are clearly growing numbers of investors allocating to passive products, whether as part of a purely passive portfolio or a combination of active and passive exposures.
But perhaps deciding whether an ETF or index mutual fund is the right passive allocation needs more thought than simply comparing the two.
Mr Zingg believes there are three key points advisers and investors should focus on if they are choosing between an ETF and a mutual fund:
- Firstly, and most importantly, what kind of exposure is the investor looking for? Sometimes a particular exposure may only be available in one type of product.
- How long is the investor intending to hold the product? This has both a trading implication - ETFs allow for intraday trading and pricing - and a cost implication.
- What are the likely costs of ownership? To compare the relative costs of holding a particular mutual fund versus a particular ETF, an investor needs to look both at the product’s underlying expense ratio and at transaction costs.
He adds: “The total costs will depend on how the investor wishes to use the product. Savings on transaction fees could outweigh savings on an underlying expense ratio if the investor is not planning to hold the product for long.
"However, if an investor is intending to hold the product for a long period, the reverse could be true.”
eleanor.duncan@ft.com
