History repeats…some ETFs seem like Mutual Funds to me…

History repeats…some ETFs seem like Mutual Funds to me…

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 surely 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 indices. 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, things I can understand. 

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 such as the S&P/TSX 60 Index (XIU) beyond my Canadian and U.S. stocks. 

Investing in plain vanilla ETFs give me security I’ll receive near market returns less minuscule fees.  If I’m looking for fun, I got plenty of practice years ago trying to play/trade penny stocks.  Those days are long over and not to be repeated.

While I think the majority of existing ETFs are excellent products for many investors, be wary of the financial industry offering niche products for their bottom-line.

What about you?  Share your comments!


6 Responses to "History repeats…some ETFs seem like Mutual Funds to me…"

  1. I couldn’t agree more Mark. I wrote about this weird phenomenon in my eBook. As a guy who is constantly pimping ETFs as the best thing going, these “new wave” ETFs kind of make me upset to be honest, because it just confuses people and gets them to stick with “buying RRSPs” at their bank (which means they are invested in terrible mutual funds). The basic ETFs that you mentioned are really all you need. Any ETF that has a MER over .5-.7% should be called a mutual fund in my opinion.

    What do you think about VUS for ETF exposure to the USA market? I’m considering taking a position.


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