Among investors who have heard of exchange-traded funds (ETFs), their level of understanding often doesn’t go much beyond “ETF good and mutual fund bad”. This shouldn’t be too surprising. We can’t all be experts at everything. But the line between ETFs and mutual funds is becoming blurred and investors will need more knowledge to make good choices.
As Jonathan Chevreau reports, many investors demand ETFs from their advisors, and now Invesco Trimark is offering “hybrids” of ETFs and mutual funds to meet the demand. We should be suspicious about calling these products ETFs when they can be sold by advisors who are only licensed to sell mutual funds.
As Rudy Luukko of Morningstar explains, most of these new products are actually regular mutual funds that invest in a single ETF. These new funds pay a trailer fee of 1% per year to advisors who sell the funds to their clients. Hapless clients, who can now be told they are buying ETFs, will pay a management fee that includes the 1% trailer plus the management fee of the underlying ETF for a total between 1.65% and 1.9% each year.
This solves financial advisors’ problems nicely. If clients want ETFs – no problem – they can have ETFs. Never mind that the underlying reason why clients want ETFs is to pay lower fees. These new products are hybrids only in the marketing realm. In reality, they walk and talk like mutual funds, but advisors can call them ETFs.
Until investors seek lower fees and demand to be told what their investments cost, they can expect more marketing efforts like this to keep them paying high fees.