The line between Mutual Funds and Exchange Traded Funds (ETFs) has been blurred the past couple of years. You will now see mutual funds incorporating ETFs in order to gain exposure to a certain sector, country, or style without having to setup a new research department and hire a portfolio manager to make the decisions. Incorporating ETFs into a mutual fund has the potential to lower Management Expense Ratios (MERs) as well as companies don’t have to pay for a full team to manage a small part of a mutual fund.
By incorporating ETFs into mutual funds, fund companies can quickly change their positions in the fund without incurring high fees or dealing with illiquid assets. Say a fund had the iShares JP Morgan Emerging Markets Bond ETF as a holding. If the portfolio manager thinks the Emerging Markets Bond market is a poor investment, he would be able to quickly move out of that position and direct the funds to another investment.
One downside to using ETF’s over active management would be the potential loss of control. When you take a large ETF like the iShares Emerging Markets Bond ETF, you will be invested in the Russian Federation, Qatar, Turkey, etc. You can’t individually include or exclude countries you may not find attractive. Active management in a mutual fund would allow this.
Please contact your investment advisor to determine what investments are suitable for you.
Mutual funds and financial planning services are offered through Credential Asset Management Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds.
By Jess McEvoy, PFP