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Thursday, April 05, 2012

Why ETFs are not Taking Over 401k

News summary by MFWire's editors

Those holding their breath waiting for ETFs to dominate the 401(k) market are turning blue, and the WSJ takes a peak at why this is so.

For one, the paper finds that ETFs are not necessarily any less expensive than institutional share classes of plain-vanilla index mutual funds. For example, Fidelity Spartan 500 Index carries expenses of 6 to 8 basis points while the SPDR S&P 500 SPY carries 10 bps in expenses.

Spokespeople at both Fidelity [profile] and Vanguard Group [profile] told the paper that the firms have no plans to build ETFs into off-the-shelf 401(k) plans.

"When ETFs were newer in the marketplace, we had plan sponsors looking interested in the product. They've begun to get more informed and understand the products better and understand the way that low-cost mutual funds serve the same purpose," Beth McHugh, a Fidelity vice president, told the WSJ.

A second issue is that ETFs are more costly and complicated to trade. The 401(k) plan can either unitize the ETF fund and trade shares once per day as it would a mutual fund, or it must trade through a brokerage account that levies commissions for each transaction.

A third hurdle is that ETFs must trade in full shares, while mutual funds trade in partial shares.

For mutual fund firms seeking access to the 401(k) channel, all of the above should be good news. 

Edited by: Sean Hanna, Editor in Chief


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