ETFs Finish In First Place

Overview: Article discusses the concept of Exchange-traded funds and states that they represent a growth industry. ETF net assets grew 20.2% in last few years. Over the period, the ICI reported, stock mutual fund assets suffered a 15.5% decline. Admittedly, the ETF asset base is much smaller. ETFs have been around less than a decade, and ETF assets amounted to less than 2% of stock mutual funds' at year-end 2000. Then again, mutual funds have had nearly a 70-year head start over ETFs in acquiring customers. ETF holders are insulated from the effects of other investors bailing because their transactions do not take place at the portfolio level. Instead, ETF shares are swapped between retail investors in exchange transactions. That has not to say that there are not liquidations from ETF portfolios; there are. However, ETF portfolio sales tend to be infrequent because they are usually limited to index rebalancing or portfolio optimizations. The creation and redemption of ETF shares through the portfolio is done only in large-block "in-kind" transactions by institutional accounts. In addition, because these trades are a kind of barter, there are no capital gains consequences. Holders of ETFs suffer less, across the board, at the hands of the taxman compared with their mutual fund-holding brethren. ETF operating expenses are lower, on average, than even bargain-basement mutual fund charges. However, it is in the area of opportunity costs that debate is more likely to swirl. Like stocks, ETFs are traded in continuous auction markets subject to bid-ask spreads. Spreads, together with the possibility of variations from NAV, represent a price for the immediacy of an ETF transaction.

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Format: HTML | Date: May 2002 | Pages: 1