Mutual funds used to be what all the cool kids were into.
Times have changed a bit. Exchange Traded Funds, aka ETFs, were born in the 1990s and offered some unique features. Here is a breakdown from Bankrate that shows how the two investment vehicles contrast with one another.1
You can see how lower expenses, tax efficiency, and faster trade-ability in ETFs would be alluring. These are some of the reasons why ETFs have seen an acceleration of growth at the turn of the millennium and continue to increase in size.
If mutual funds are the big brother in the investment world of stock and bond baskets, ETFs are the little brother that isn’t so little anymore. As of August, they’ve added almost as they did all year last year—plus $700 billion. Now a whopping $9 trillion.2
That’s nowhere near the over $40 trillion of assets in mutual funds, but lately ETFs have been punching ‘em in the nose. In 2020, mutual funds had outflows of $289 billion, while ETFs had inflows of over one-half a trillion.3
Even Morningstar, the popular rater of mutual funds the last several decades, has an article by their Vice President of Research titled “Farewell, Mutual Funds”. The author foresees the eventual triumph of ETFs over mutual funds, yet admits it will take quite a while.
We find value in both kinds of investment vehicles, yet like any investment, it’s important to pay attention to the uniqueness of each investment vehicle and changes in the history of finance. One can’t be sure, but don’t be surprised if ETFs supersede mutual funds in everyday language for investing in a diversified container of stocks or bonds.