Why ETFs Are Winning the Fund War

by Kyle Woodley | January 31, 2014 10:46 am

Why ETFs Are Winning the Fund War

The world is rife with stats that show ETFs are increasingly hitting mutual fund managers where it hurts — the wallet — but I’d like to briefly share my own personal experience as another reason why mutual funds are destined to fall by the wayside.

While working on a story suggesting several Janus mutual funds[1], the writer (Will Ashworth) and I ran up against some discrepancies in the funds’ returns.  The issue was that his returns were based off Janus’ Class D shares, which are only open to existing shareholders — ergo, we certainly couldn’t recommend them to any new investors.

In the subsequent search to find no-load (ergo, no-sales-charge) funds, we finally settled upon Class T shares. But even these can only be bought through discount brokers such as Fidelity, so it’s possible that some readers might not be able to access to these funds, either.

In fact, for its various mutual funds, Janus offers eight different classes (including those inaccessible Class D shares) that involve different sales charges, management fees, minimum investments and other nuances. Example: The Janus Fund, which goes under the tickers JDGAX, JANDX, JGOCX, JGORX, JGROX, JDGNX, JDGRX and JANSX, depending on what you’re privy to.

And they’re not cosmetic differences. These funds have different fees and sales charges that can significantly affect performance — to the point where Janus High-Yield N Shares (JHYNX[2]) somehow earns a 4-star rating from Morningstar, whereas the Janus High-Yield A Shares (JHYAX[3]) gets only 2 stars.

This isn’t a specific knock on Janus, either. Many other big-time fund providers such as Fidelity and even low-cost Vanguard serve up this confusing bowl of differing fees and alphabet soup.

Blackstone (BX[4]), for instance, offers a fund that’s simply meant to replicate the return of the S&P 500. Actually, it offers five of them — BSPAX, BSPIX, BSPSX, BSPZX and WFSPX, which range from 0.16% to 0.48% in expenses*.

However, the company offers one (and only one) ETF — the iShares Core S&P 500 (IVV[5]) — that does the exact same thing. It charges just 0.07% in fees and requires no sales charge, and you get virtually identical performance to the other funds. Which is logical — they’re all tracking the same thing.

So why on earth are investors forced to suffer the mutual fund alternatives?

The big hangup is that ETFs currently are only available in a mere sliver of the country’s 401k plans. Most 401ks only offer mutual funds, which means you don’t get the option to buy the IVV — you use whatever funds and fund classes are available through your employer’s program. However, more plan sponsors and investors alike are pushing for more inclusion of ETFs[6], so (hopefully) this gap will erode in time.

That said, some people still have a choice.

If you hold mutual funds in your IRA or other brokerage account, you have the option to dump the old and adopt the new. Sure, some mutual funds do benefit from active management that can make more specific choices than simply following an index — and you should keep those.

But many mutual funds are actually hampered by active management, and other mutual funds are tied to an index, too. Both are easily replaceable by a low-cost ETF.

Don’t deal with the hassle and higher expenses of mutual funds’ alphabet soup. Consider replacing some of your mutual fund holdings with similar ETFs, and dog your workplace about adopting ETFs in its 401k plans. Every battle you win on the fee side can help your wealth grow more down the road.

* Blackstone’s C1 shares, BSPZX, do not have a listed expense ratio as of this writing.[7]

Kyle Woodley[8] is the Deputy Managing Editor of InvestorPlace.com[9]. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley[10].

Endnotes:
  1. Janus mutual funds: http://investorplace.com/2014/01/5-top-mutual-funds-janus-funds/
  2. JHYNX: http://studio-5.financialcontent.com/investplace/quote?Symbol=JHYNX
  3. JHYAX: http://studio-5.financialcontent.com/investplace/quote?Symbol=JHYAX
  4. BX: http://studio-5.financialcontent.com/investplace/quote?Symbol=BX
  5. IVV: http://studio-5.financialcontent.com/investplace/quote?Symbol=IVV
  6. are pushing for more inclusion of ETFs: http://www.etf.com/sections/features/18976-cogent-interest-growing-for-etfs-in-401ks.html
  7. do not have a listed expense ratio as of this writing.: http://www2.blackrock.com/us/individual-investors/ECON?appname=wsod_profile&blkifrmurl=https://www.blackrock.wallst.com/public/fund/profile.asp?symbol=BSPZX
  8. Kyle Woodley: http://www.investorplace.com/author/kyle-woodley/
  9. InvestorPlace.com: http://investorplace.com
  10. @KyleWoodley: https://twitter.com/kylewoodley

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