Although non-ETF mutual funds have a 69 year headstart, Deloitte
thinks that ETFs should be able to compete in today's market. Exchange traded funds are experiencing a boom in popularity, especially in the wake of the economic crisis, and Deloitte notes that if ETFs can maximize profitability, they could end traditional mutual funds' market reign.
A Deloitte report, titled Exchange-Traded Funds: Challenging the Dominance of Mutual Funds
, claims that attracting new capital will be essential if ETFs are to remain competitive. The accounting firm lists several factors that they think will lead to increased profitability, possibly challenging mutual funds' market share.
Deloitte suggests that ETFs should stick to less exotic indices, noting that those funds linked to commodities and equities, and those with simple betas, are cheaper and perform better than their exotic companions. (Of course, index mutual funds already offer investors access to less-exotic indices, as well as some exotic ones.)
Another factor is a long ETF shelf-life, and funds should lean towards the long-term to attract investors. Other approaches include making ETFs more retail-investor friendly by lowering commission costs, ensuring low tracking errors, and increasing their appeal to 401(k) participants.
In all likelihood, ETFs will not surpass traditional mutual funds in assets any time soon. But, they are seeing a rapid growth in popularity and AUM as advisors turn to them because of tax efficiency and transparency. The total net assets of U.S.-based ETFs increased from $72.13 billion in January 2001 to 610.31 billion in May 2008, before dropping to $531.28 billion in December.
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