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ETFs vs. Funds: It’s all over but the shoutin’

I was looking over a summary of new ETF launches this year and was struck how many of them came from traditional mutual fund companies – JP Morgan, Franklin, Principal, Nationwide, Oppenheimer to name a few. I guess it is not really surprising that they are interested in ETFs. Perhaps a more pertinent question is what took them so long?

Investors and their advisors have known for a long time that ETFs provide a better set of benefits than funds and have been moving money toward them for the better part of the last two decades. It seems once investors experience full transparency, daily liquidity, substantially lower fees, incredible flexibility and near zero distributed capital gains, they don’t want to give those things up. Go figure.

The dam has burst over the last few years and the flow of funds towards ETFs has now led to over $3 Trillion in the category in the U.S. If it were not for inertia, taxes and the multilayered decision processes involved in accessing 401(K) platforms, the numbers would be even higher.

Looking into the future, I would expect a continuation of growth in ETFs at the expense of traditional mutual funds as well as hedge funds. Active Management is changing from traditional stock picking to managing a series of betas on different asset classes in intelligent, global diversified portfolios. ETFs are the backbone of such strategies for one simple reason. Because of their full transparency, investors can understand their risk exposures, their factor exposures, historical correlations among ETFs and other important quantitative metrics. Imagine trying to do that with funds where you NEVER get a full, real time view of what your manager holds. At Astoria, this deep dive into the interrelationship of our ETF holdings is central to how we add value and help investors and advisors build thoughtful portfolios.

So ETFs are winning the battle against funds. With their structural benefits, they have brought a gun to a knife fight. The next challenge is to build, global, multi asset portfolios for investors that harness ETFs’ full power. To do this requires deep knowledge of how ETFS are constructed, how they trade, how their indexes rebalance, how they are taxed, how they correlate, etc. This is where Astoria excels. So we may yet use the products of the traditional mutual fund companies to help us but only the recently launched ones borne from their recognition that they had to upgrade their offerings.

Best, Bruce Lavine

Senior Strategy Advisor of Astoria

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