Morningstar: ETFs Will Never Replace Mutuals

By Murray Coleman - originally published June 24

Is the Morningstar director's prediction a true reflection of the fate of ETFs?

As Morningstar's annual three-day conference gets under way in Chicago, one of its directors has some interesting comments about exchange-traded funds.

Don Phillips, Morningstar's director of corporate strategy, research and communications, told JoAnne Von Alroth of Investor's Business Daily that ETFs will never replace mutual funds.

He said: "It's natural that over time portfolios become more sophisticated, but I don't think most people have the time to get the diversity exclusively from ETFs that they can get in mutual funds. The traditional open-end mutual fund will continue to be the building block of most people's portfolio."

To be fair, Phillips also praised ETFs for their low costs and flexibility.

Still, it's interesting to note that this year Morningstar is grudgingly holding one (count ‘em) workshop devoted to ETFs. I say "grudgingly" because last year I was amazed to find no program devoted to the popular investment vehicle ... and voiced my displeasure to both Phillips and others.

And based on Phillips' latest statements on the subject, it's easy to see why Morningstar has such a lackluster attitude toward ETFs.

Perhaps he's correct. But this annual get-together in recent years has increasingly been focusing on attracting more advisors. It seems rather odd that as surveys by trade groups representing advisors clearly show that ETFs are expected to be the hottest new type of fund added to portfolios over the next several years, Morningstar would be so dismissive of these types of funds.

It makes one wonder whether such an attitude tells us more about Morningstar's strategic business plan than their collective ability to grasp the growing influence of this type of open-end fund.

Comments

[Indexor]

Of course its all about Morningstar's strategic business plan and always has been. Mstar was threatened from day one back in 1993. But as iShares and others really got the ball rolling for ETFs in this decade, Mstar continued to protect its franchise with negative articles and poor "ratings" on ETFs.

If Vanguard hadn't gotten patent protection (which should be challenged all the way to the supreme court) for issuing an ETF class for a provider's existing funds, every fund family in the business likely would have followed Vanguard's lead to expand their funds into the ETF arena. Mstar could quickly lose credibility among their subscriber base to anyone willing to step up and become the Mstar-like service for the ETF space. And I can't think of a better group than IndexUniverse to take up that challenge.

[carey_jim]

The truth is often obvious. Then, all that is needed to discover it is to look at what's in front of us and use reason to draw appropriate conclusions.

But reason is often hobbled by emotion: Fear of losing one's job, greed, fear of financial ruin, social ostracism ....

Our ability to see the world is also hobbled by emotions. The fable of the Emperor's New Clothes teaches us that: No one around the King had the courage to tell him that he was wearing no clothes at all!

"A man hears what he wants to hear and disregards the rest."

[User 219937]

Brilliant assessment, Murray.

I believe that many advisors still harbor fears, wondering if ETFs are a gimmick or threat. Is advisor money moving into commodities & narrow sectors in a big way? No, these professionals and their clients are only just awakening. Older advisors are still wary of commodities, after a 20 year bear market. Those already invested are vanguardist, ahead of the learning curve. MStar is not.

Remember always, the great pool of retirement money is CONSERVATIVE. Anticipate fund companies fearmongering against the competition in subtle ways, too. Their long term lifecycle products (75/25) are down -14.4% YTD (on avg), but the 401k suckers will stay married to lackluster & losing investments for only so long.

It's business as usual... until its not LOL.