5 Reasons to Consider Switching from Mutual Funds to ETFs

Head of Strategic Partnerships
05/01/2020

WisdomTree launched in 2006 with a novel idea—generate the alpha that investors expect from active mutual funds, but in a better investment wrapper: ETFs.

Nearly 14 years later, ETFs have seen record inflows, but we believe the shift from mutual funds to ETFs will only accelerate from here. Why? The ETF wrapper offers many advantages to investors over mutual funds, including:

  1. Tax Benefits. When portfolio managers make changes in a mutual fund, those changes create taxable events for its investors. In some cases, shareholders of a mutual fund can get hit with a capital gain tax even when the mutual fund has negative performance. This is not the case for ETFs. In most cases, when you buy an ETF the applicable taxes are based on the price difference between the times exchange-traded fund shares are bought and sold.
  2. Simplicity. ETFs have no paperwork. You simply buy or sell the ETF like a stock—one price with one easy transaction. Mutual funds require paperwork and typically have a short waiting period before your money is invested.
  3. Cost Effectiveness. On average, ETFs have lower expense ratios than mutual funds. In fact, according to ICI, in 2018 the average active mutual fund still charged around 2.5 times more than the average ETF.¹
  4. Transparency. ETFs show their underlying holdings every day, while mutual funds only show their holdings at the end of the quarter. During market volatility, it is important to know what you own.
  5. Liquidity. ETFs can be bought and sold throughout the day like a stock. Mutual funds, on the other hand, can only be bought and sold at the end of the day. In volatile markets, ETFs can be a great tool to establish positions quickly. Also, there is no barrier to exit ETFs. In contrast, certain class shares of mutual funds may have redemption fees.

With all the benefits of the ETF structure, it’s no wonder investors put more money into ETFs than mutual funds in 2019.²

The great news is that when you marry the advantages of the ETF structure with WisdomTree’s Modern Alpha® approach, you have the potential to outperform.

With the recent volatility in the markets, now is a great time to consider switching from mutual funds to ETFs.

 

 

¹Source: “Trends in the Expenses and Fees of Funds,” ICI Research Perspective, 2018. Ordinary brokerage commissions apply.
²Source: “Breaking down a record year for ETFs,” Investment Executive, 2020.

Important Risks Related to this Article

Neither WisdomTree Investments, Inc., nor its affiliates, nor Foreside Fund Services, LLC, or its affiliates provide tax advice. All references to tax matters or information provided in this material are for illustrative purposes only and should not be considered tax advice and cannot be used for the purpose of avoiding tax penalties. Investors seeking tax advice should consult an independent tax advisor.

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About the Contributor
Head of Strategic Partnerships
Alisa Maute CIMA®, CAIA℠ is the Head of Strategic Partnerships at WisdomTree Asset Management. As Head of Strategic Partnerships, she is responsible for leading the firm’s initiative to establish and drive strategic partnerships with high priority clients and prospects globally. Prior to her role of Head of Strategic Partnerships Ms. Maute was Head of US Distribution for WisdomTree for four years. In that role, she developed and implemented distribution strategy, oversaw the US Intermediary and Institutional Sales teams and ran US National Accounts. Prior to her role of Head of US Distribution Ms. Maute was a Regional Director for the firm for 7 years. Her responsibilities included identifying and cultivating important relationships across the financial and investment advisor community, ranging from Broker-Dealers, RIAs and Family Offices, to ETF Strategist and Bank Trust sub-channels.

Prior to joining WisdomTree, Alisa was Vice President and Regional Sales Manager at Van Kampen Investments.  Her responsibilities included strategic planning, organization and oversight for the division and management of 20 sales consultants. She began her career at Morgan Stanley Investment Management.

Ms. Maute is a Certified Investment Management Analyst and Chartered Alternative Investment Analyst. She holds a Masters of Business Administration from DePaul University, where she graduated with honors, and a Bachelor’s of Business Administration from The University of Iowa. She is the co-head of marketing for the Chicago chapter of Women in ETFs, and a member of the Investment Management Consultants Association and the Chartered Alternative Investment Analyst Association.