For years, the financial industry has promoted and used mutual funds for personal and institutional portfolios. Actually, it’s been more than years, centuries in fact. The advent of mutual funds dates back to the late-1700’s in Europe.
The first Canadian mutual fund, Canadian Investment Fund Ltd. (CIF) was established in 1932. Since then, the name has changed: from Spectrum United Canadian Investment Fund to CI Canadian Investment Fund but the premise remains the same: ordinary investors who have minimal capital can pool their funds into a professionally managed investment product.
The first major sign of growth and popularity of mutual funds in Canada started in the 1960’s when total assets under management (AUM) doubled from $540 million in 1960 to more than $1 billion by the end of 1963. But the largest influx into mutual funds in Canada came during the 1990’s when double-digit interest rates lured Canadian investors into investment products with the potential for higher returns.
Since the 1990s, mutual funds continued their ascent into the portfolios of Canadian households, with AUM increasing from $25 billion in December 1990 to $426 billion by December 2001, with latest figures close to $800 billion. No doubt mutual funds remain big business in Canada and likely will for decades to come. However I have to wonder with so many niche ETF products hitting the market if financial history is repeating itself right before our eyes.
We’re on our way to having a diverse menu of 300 Exchange Traded Funds (ETFs) to select from in Canada after having just a handful or so 10 years ago. More ETF products are on the way.
Since those ETFs were available a decade ago, I’ve read about a host of “new wave” ETF products that do not track any standard index. Instead some new ETF products or niche products have been designed to mirror creative indices. In a few cases, these ETF products have very low trading volumes, so I liken them to venture stocks. There are now double-inverse ETFs that go beyond inverse ETFs, so you can try and profit from declines in broad market indicies. Seems like a good idea but I struggle with these types of products, at least for my portfolio. As an investor, maybe I’m not sophisticated enough. Then again I’ve always been a fan of vanilla over neapolitan.
While the differences between mutual funds and ETFs are numerous I can’t help but think some of today’s new wave ETFs are cheaper, repackaged mutual funds in disguise. Mutual funds still offer Canadian investors a means to accumulate wealth if selected and used properly, but that’s a big IF in my opinion. Some of these niche ETFs seem to offer the same personalized investment solutions that many mutual funds have delivered for generations:
- Convenient administration
- Risk management through diversification
- Opportunities for foreign and domestic holdings
- Innovative fee structures
How long will it be before the number of ETFs rival the number mutual funds? 10 years? More? Less?
I really don’t know the answer but I confess the answer doesn’t matter to me because to date I only invest in broad market ETFs that track established industry indices; S&P/TSX 60 Index and the DEX Bond Universe Index to name a couple. ETFs like XIU and XBB provide me with a great deal of security, knowing I’ll receive near market returns less miniscule fees. If I’m looking for fun, I got plenty of practice years ago trying to play/trade small cap stocks. Those days are long over. I invest in only broad market ETFs like XIU, XBB, VWO and a couple of others, and Canadian and U.S. dividend-paying stocks. That’s it.
While I think the majority of existing ETFs are excellent products for many investors, based on some of the boutique ETFs I’ve read about…I say to the financial industry keep them coming. I won’t be buying any.
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