The ETF-Mutual Fund Debate Continued: Money, Money, Money

By Matthew Hougan

In response to Murray Coleman's and Jim Wiandt's recent blog posts: The real reason ETFs will have a hard time taking over the world is money.

The dirty little secret - wait, it's not a secret at all - is that most mutual funds are sold, not bought. Load charges and 12b-1 fees are used to compensate advisors for recommending particular funds to investors. The biggest challenge to ETFs (outside of the 401(k) arena) is that mutual fund and closed-end funds have a huge advantage in terms of distribution, as it's much easier to "compensate" advisors and wholesalers for pushing particular mutual funds than it is for ETFs.

Inside 401(k)s, ETFs face additional challenges, as outlined brilliantly by David Blanchett and Gregory Kasten in this piece from the Journal of Indexes.

All that said, I'm optimistic enough to believe that the best structure will win out. ETFs have grown much faster and for much longer than anyone anticipated, and anyone who questions that growth going forward is foolish. Remember, Lipper issued a study in 2002 saying that ETF asset growth was about to "grind to a halt."

Oops.

I don't know if ETFs will eclipse mutual funds on a net asset basis - an even better structure might come along first - but they are going to grow fast for a long, long time.