Every year, mutual fund managers, executives and various other industry personnel gather in Chicago for the Morningstar Investment Conference to share ideas on the state of their industry. The latest conference was held a few weeks ago, and, according to one report, there was a conspicuously absent discussion of what I think is the biggest threat to the mutual fund industry — the rise of exchange-traded funds (ETFs).
The article I’m referring to, which appeared on ETF.com, was appropriately titled, “Behind Closed Doors, ETFs Are All the Rage.” The piece correctly points out that “the ETF market is the fastest-growing segment in the financial world today, expanding at roughly a 25-percent-a-year pace and now boasting more than $1.85 trillion in assets in the U.S. alone.”
Unfortunately, the mutual fund industry wants to keep that inconvenient truth on the back burner and from you, the investor.
But why do they want to hide the facts? Simple: because the growing popularity of ETFs will almost certainly put the brakes on the mutual-fund-fee gravy train.
You see, when people realize how much of their money is going to pay for those high-priced mutual fund managers, executives and support personnel to go to conferences such as the aforementioned Morningstar gathering, they aren’t going to like it. The mutual fund industry also realizes investors are going to like the fact that they only have to pay a fraction of the cost in fees to own many ETFs that are essentially the same as those high-cost indexed mutual funds.
I suspect that as more and more investors realize the virtues of owning exchange-traded funds over mutual funds, the mutual-fund-fee gravy train will continue to dry up. That is a great thing for you, the individual investor, because the less you pay out in fees, the more money you keep in your pocket — and the bigger you’ll be able to build your ETF nest egg.