There are at least three things that mutual funds are not: 1) Exciting, 2) Sexy, and 3) Dead meat.
I’ve been investing in mutual funds for more than 20 years, recommending them to clients for 15, and writing about them online for five.
Why? Because I’ve found that the kind of investing that is exciting and sexy is the same kind that receives the most attention from financial media — and it’s also the same kind of investing that tends to get investors into trouble.
Therefore the primary reason I invest in, recommend, and write about mutual funds (and the main reason they are not dead meat) is because they are not exciting or sexy.
Furthermore, mutual funds are here to stay for a long, long time. And because you didn’t decide to read this story about mutual funds without getting some substantial meat to chew on, here are three reasons mutual funds aren’t dead meat:
There Are Few Alternatives to Actively-Managed Mutual Funds
Index mutual funds are definitely hot and it doesn’t hurt the mutual funds industry when Warren Buffett’s annual letter to shareholders of Berkshire Hathaway Inc (BRK.B) has the Oracle of Omaha noting that his money will be invested in Vanguard Investments index funds when he dies.
But a lesser-reported and possibly more significant reason mutual funds are staying alive and attracting new investor assets is because they still offer the vast majority of actively-managed funds in the investment universe.
There are a handful of actively-managed ETFs but mutual fund companies such as American Funds have massive market share on the actively-managed market and it looks to stay that way for quite some time. Mutual funds like American Funds Growth Fund of America (AGTHX), with more than $140 billion in assets, are like institutions in themselves. Brokers keep selling them because of the loads, commissions, and revenue sharing capacity.
Even index fund shops like Vanguard has some of the best active management funds available to investors today.
Mutual Funds Are the Preferred Choice of 401(k) Plans
Defined contribution plans, such as 401(k) plans, are the most popular employer-sponsored plans in the United States. And guess what security type is by far the most-used in these plans? You guessed it — mutual funds.
Here are some quick 401(k) stats, updated in April 2014, from the American Benefits Council:
- 638,390 defined contribution plans
- 95.3% of plans made a matching contribution in 2012
- 73,668,000 active plan participants
- $3.8 trillion in plan assets
This massive number of plans, participants, and ongoing contributions to mutual funds in defined contribution plans will not likely end anytime soon. In fact, the trends clearly show more assets flowing into mutual funds through these retirement plans.
Also, before I started my own registered investment advisory firm, I worked for a large, regional pension consulting firm. Therefore I know from professional experience that mutual funds are the top choice for defined contribution plans for two primary reasons:
- On the administrative and accounting side, mutual funds don’t trade intra-day like ETFs and the bean counters like the cleanliness and simplicity of just one daily-valued price.
- Mutual funds offer revenue-sharing arrangements to plan providers and brokers, while ETFs don’t.
Bottom line: Mutual funds won’t be anywhere near dead meat status until defined contribution plans stop using them.
Mutual Funds Assets Are Huge and Still Growing
Yeah, the popularity and assets of ETFs are growing faster than mutual funds, but ETFs are still the new kid on the block compared to mutual funds in terms of assets.
According the Investment Company Institute, as of the end of November 2014, total mutual fund assets were approximately $16 trillion and the total assets for ETFs was just under $2 trillion. Also at the end of November, there were 7,898 mutual funds compared to 7,701 in 2013. There were 1,411 ETFs in November 2014 compared to 1,286 ETFs a year prior.
This data does demonstrate that the number of ETFs coming on the market on a year-over-year basis is increasing at a much faster rate by percentage. But the data also clearly demonstrates that mutual funds are not going the way of the Dodo bird anytime soon.
While there are many other reasons mutual funds are alive and well today, mutual funds have the ideal combination of qualities, such as simplicity, accessibility, and diversity of choice that make them an ideal match for both investment advisors and do-it-yourselfers.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.
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