Word: mutuality
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Since most ETFs only mirror a market index, such as the S&P 500, they won't outperform the index. But increasingly, investors see that outperformance quest as more of a pipe dream. "Only 20% of [mutual-fund] portfolio managers actually beat the index that they're tracking," says John Spallanzani, director of ETF sales and strategy at GFI Group. "So if you put your money in an ETF, you're basically beating 80% of the mutual-fund managers out there." ETFs are also more liquid than mutual funds, because they can be bought, sold or shorted throughout the trading...
Advisers also warn investors to choose larger ETFs over smaller start-up ones, especially when it comes to global and emerging-market funds. Unlike mutual funds, investors face price spreads when buying and selling ETFs, and these spreads can be quite wide - spanning several percentage points in some cases - when the ETF is small or its underlying stocks don't trade much...
...large spread can effectively wipe out any cost advantages over mutual funds. "You might save 20 basis points [i.e., 0.2 percentage points] on the cost of the ETF, but what if you're paying 200 basis points [2 percentage points] more because of the trading spread?" asks Borek. The spread risk is exacerbated in emerging markets and specialized niches in the global markets, where data are scarce and trading is limited...
...actively managed. Firms ranging from Invesco to Pimco have launched about 12 of these funds over the past two years; others, such as T. Rowe Price Group and John Hancock Funds, are preparing to roll out similar funds, all in an effort to go head-on against actively managed mutual funds. "It's clearly a category that's attracting more interest among ETF providers and mutual-fund companies," says Standard & Poor's Tom Graves. "It combines the characteristics of a passive, index-based ETF with that of an actively managed mutual fund." (See pictures of the stock-market crash...
Active ETFs would likely require higher fees than passive ETFs because the active players need to cover research and commission costs, although most experts believe the fees would still be cheaper than those charged by mutual funds. Among the currently offered active ETFs, annual fees range from a low of 0.35 percentage points to a high of 1.6 percentage points. (See the top 10 financial-crisis buzzwords...