Rob Rushe, Head of ETF services, EMEA, BNY Mellon, says mutual fund managers could benefit from adopting some of the most popular aspects of ETFs, such as extensive use of technology, ease-of-use and greater transparency.
ETFs have been one of the biggest hits stories in the investment world in recent decades. By the end of 2018, the value of ETFs issued globally was almost €5 trillion. Although the United States still dominates the market, 15% of global asset value is now attributable to European ETFs. And European ETF assets under management have increased more than six fold in the past decade.1
ETFs are seen as a challenger to the traditional mutual fund industry and have gained ground partly at their expense. However, ETFs have a number of other benefits that have proved attractive to investors:
• Unlike mutual funds they do not have complex and costly distribution networks. Instead, they are bought and sold just like shares via regular brokers and have lower costs than mutual funds. As more investors have begun to manage their own money – often via online platforms – costs have become increasingly important.
• ETF pricing is transparent and easily available; ETFs can be bought or sold whenever the market is open, and the products are simple to access and understand. The financial crisis of 2008/2009 highlighted the benefits of being able to trade in and out of products rapidly – many investors came to favour ETFs as a result of this experience. In contrast, mutual funds are seen as having opaque pricing and complex trading procedures.
In recent years a new generation of investors has begun to gather assets. Millennials are digital natives and have grown up with an app culture: they expect to see pricing, analytics, trade information and other data immediately via their smartphones. For them, ETFs seem better aligned with their expectations than mutual funds.
Focus on Ease of Investing and Improved Access
Nobody hopes or predicts that the mutual fund industry will morph into the ETF industry. Some asset managers issue both mutual funds and ETFs while others have decided to focus on only one part of the market. Regardless, mutual funds and ETFs play unique roles for investors and serve different investment objectives. For instance, mutual funds may be more suitable than ETFs for illiquid assets such as certain real assets or hedge funds.
Moreover, ETFs have lost some of their advantages in recent years. For example, mutual fund fees have fallen following initiatives such as the U.K.’s Retail Distribution Review (RDR). Research by Morningstar shows that passive equity funds reduced fees by 28% in the five years after the introduction of the RDR in late 2012, while active equity funds’ fees fell by 18%.2
Nevertheless, the ETF industry’s success could offer some valuable lessons for the mutual fund ecosystem:
• Mutual funds – and their distribution platforms – should embrace millennial investment behaviour, which is focused on ease-of-use and advanced technology.
• Mutual funds should improve speed of access, both for research – allowing users to more easily understand the underlying assets, performance, fees and other characteristics of a fund – as well as for trading.
Some of the fundamentals of mutual funds are non-negotiable. For example, mutual funds cannot become trading vehicles similar to ETFs because of their fixed pricing schedules. However, the mutual fund industry should still try to improve ease of investing and access to a broader range of products. Moves by some stock exchanges to list mutual funds on their platform alongside ETFs will help address this challenge. At the least, mutual fund providers would be wise to invest the time and effort to understand the continuing growth of a major competitor to their market.