ETF’s (exchange traded funds): a comprehensive assessment by Deloitte
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In a recently issued report Deloitte, a major international independent auditing and accounting firm, provides an introduction to ETF’s, including how they are formed and a comparison between ETF’s and mutual funds. They also look at the proposed changes in ETF regulations in the USA and what the near future holds for ETF’s. Lastly, they question whether ETFs will challenge the dominance of mutual funds in the future. (if you are curious, their answer is that given that
mutual funds have a 69-year head start on ETF’s it is unlikely that ETF’s will become bigger in terms of net assets anytime in the near to medium term. However, ETF’s will increase their share of investment dollars as more investors find them to be an attractive option.) We provide in this commentary extracts from the some of the key parts of the report, in the hope it will encourage our readers to read this well written, comprehensive report.
The following are highlights from the report
doc.1413
The future?
ETFs are already challenging the dominance of mutual funds, and this trend will continue with greater intensity. In a survey of investment professionals conducted in March 2008, 67 percent called ETFs the most innovative investment vehicle of the last two decades, and 60 percent reported that ETFs have fundamentally changed the way they construct investment portfolios.1 While ETFs are not expected to surpass open-ended mutual funds’ assets under management, they are expected to capture a greater percentage of current and future investment capital. Research suggests that mutual funds will decline approximately 10 percent in a typical portfolio product mix, and most of this reallocation is expected to impact ETFs. P. 4
Why the ascendance of ETF’s
There are several reasons for this:
New SEC rules that will make it easier to launch ETFs
New disclosure rules that will make ETFs more popular
with retail investors
More 401(k) plan money that will be invested in ETFs
Greater tax efficiency of ETFs
Lower costs of ETFs
Liquidity
Market-exposure diversification
Transparency
An increasing number of mutual fund complexes that enter the ETF business. P. 4
ETF’s and mutual funds
The study compares in easy to read, table form ETF’s and mutual funds (p. 8-10), and reviews the emergence of actively traded ETF’S (p.11). Their conclusion: actively managed ETFs will probably not challenge the dominance of index-based ETFs — their Targets will be mutual funds; p. 15.
SEC
In a recently issued report