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Why Mutual Funds Need To Feel Threatened

By Kevin Grewal, Editorial Director at SmartStops.net
The exchange traded fund (ETF) world has emerged with full force and continues to put pressure on the mutual fund industry.
ETFs are so attractive because they have opened up a new panorama of investment opportunities for all types of investors. They enable investors to grab broad exposure to stock markets of different countries, emerging markets, sectors and styles as well as fixed income and commodity indices with relative ease on a real-time basis and at a much lower cost than other forms of investing. They can be traded intraday while enabling investors to remain diversified and have full transparency. Additionally, they are so versatile that they can be bought on margin, are lendable, can be bought and sold at market, limit or as stop orders. They don’t have any sales loads and carry expense ratios in the range of 0.05% to 1.60%. 
From a broad market perspective, these aforementioned low expense ratios make it feasible for investors to remain diversified while grabbing exposure to the three major U.S. indices.   For example the PowerShares QQQ (QQQQ) which has an expense ratio of 0.2% and enables one to grab exposure to the technology heavy Nasdaq. Additionally, one can grab great exposure to the Dow Jones Industrial Average through the DIAMONDS Trust Series 1 (NYSEARCA:DIA), which has a low expense ratio of 0.17%. Lastly, the S&P 500 can be accessed through the SPDRs (NYSEARCA:SPY), which has an expense ratio of 0.09%.
Another great characteristic of ETFs is that they have a unique daily creation and redemption process which enables them to keep their market price in line with its underlying Net Asset Value.   They can only be redeemed “in-kind” which is beneficial because it doesn’t create a taxable event. 
Just to get an idea of how the ETF world has emerged here is a brief landscape of the industry. There are over 1,677 global ETFs with over 3,000 listings from 90 providers on 43 exchanges around the globe. Additionally there have been 109 new ETFs that have came to market this year and plans to launch an additional 756 new ETFs are in the making. 
So why should mutual funds feel threatened?   A study done by New-York based research and consulting firm Novarica indicates the following predictions for the investment industry:
·         The number of mutual funds will decline from 8,022 in 2008 to 4,237 in 2015 with assets declining from $9.0 trillion to $6.75 trillion over the same period
·         The number of ETFs is expected to increase to 2,618 by 2015, with assets more than doubling to $1.15 trillion
·         The number of actively managed ETFs will increase to 325 by 2015, currently there are ahandful of them offered by ProShares and Grail Advisors.
To add to these predictions mutual funds have continuously been seeing outflows of assets while ETFs have been witnessing an inflow of assets. Additionally, as investors become more educated about the markets and the plethora of investment tools at their disposal, ETFs will continue to grow and remain attractive. Lastly, ETFs are finally starting to make their way into the 401(k) world, which will just be icing on the cake.
To conclude, as investors become more active in managing their portfolios and seek ways to protect themselves from market downfalls and cut risks, the underlying characteristics of ETFs will continue to enable them to grow. 
A good way to cut risk out of one’s portfolio is to have an exit strategy. The way to implement an exit strategy with a portfolio of ETFs is to utilize stop-losses, which can be easily implemented by going to www.SmartStops.net. Not only does www.SmartStops.net offer a service which provides investors with triggers on when an upward trend of an ETF is coming to an end, but it is updated daily to reflect market fluctuations.