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ETFs and Mutual Funds: What is the real relationship?

by Drew Maniglia

One does not need to have an ear to the ground to notice the ubiquity of Exchange-traded funds in today's asset management industry. The ETF makes frequent appearances in industry journals and articles and can even be found advertised atop New York City taxicabs. But, despite the to-do, I am not convinced that the lay investor, and perhaps even experienced financial advisor, truly understands the difference between ETFs and other types of investments, specifically Mutual Funds.

Recent articles in Ignites have discussed the ETF's entrance into new platforms like 401ks and annuities. Furthermore, throughout both 2008 and 2009, the ETF's market share continued to expand while Mutual Funds experienced negative net flows. Hordes of new ETF products continue to appear on the market, and more fund companies have stepped into the arena. Many advisors surveyed in the 4Q:2009 FA Vision Benchmarking survey mentioned their satisfaction with and preference for ETF products in the qualitative response sections.

But, do investors and advisors understand how to appropriately use all of the available investment tools? To many, the ETF looks like a Mutual Fund that can simply be day traded; in this respect, it appears to be the "better" Mutual Fund, or a Mutual Fund with added benefits. Perhaps ETFs and Mutual Funds are not meant to be used interchangeably, though. Asset management companies should be sure to carefully distinguish between these tools. A campaign to turn the public's attention towards the burgeoning ETF should be accompanied by an educational campaign to highlight its intended applications and distinguish it from the Mutual Fund. This presentation from iShares is a good example.

If investors and intermediaries are to yield maximum value out of the myriad available investment types, it is integral that they should understand the specific purposes of each.