The first American mutual fund started in 1928, now there are 9,599 active mutual funds holding $21 Trillion
Opened to investors in 1928 and widely regarded as the first modern mutual fund, the Massachusetts Investors’ Trust is the progenitor of the well-known MFS Investment Management mutual fund firm.
Later that same year, the Wellington Fund was introduced. This fund was the first such fund to include both stocks and bonds. Before Wellington, only a merchant-bank style of investments in trade and business was available in funds. As time went on, more companies began to offer many varieties of mutual funds.
Mutual funds changed the investing game forever. For the first time, average Americans could gain access to the stock market and receive the benefits of broad diversification, safety, and professional management. They were a prime catalyst for change in the financial services industry, pushing many corporations into becoming more efficient and profitable.
In the 1980s, the appetite for mutual funds began to grow. This demand eventually resulted in mutual funds, becoming the basis of millions of Americans’ retirement plans. Recently, mutual funds have come under closer scrutiny than in the past. The (often hidden) fees and financial incentives given to advisors selling them are concerning to both consumers and industry experts.
Pamela Yellen, bestselling author, and financial columnist, writes. “The fees in far too many mutual funds are horrific wealth-killers. The fund industry hopes we all continue to believe that a fee of .5% or 1% a year is pretty insignificant.”
Yellen maintains that the compounding of such fees has a devastating impact on retirees’ accounts. As an example, Yellen cites Department of Labor reports, which indicate that an annual fee of as little as 1% inside a retirement account can devour 28% of a person’s savings over 35 years, assuming average returns of 7%. https://www.bankonyourself.com/forbes-pamela-yellen-interview-scared-to-publish.html
For these and other reasons, many in the financial services industry believe that mutual funds will eventually die off, to be replaced by less costly alternatives, such as ETFs. ETFs, (Exchange Traded Funds) are a newer type of investment vehicle created to take advantage of the best aspects of both mutual funds and stocks. An ETF is a combined investment structure that strives to leave out many, if not most, of the less desirable components of mutual funds.
Unlike mutual funds, ETF’s provide a great deal of tax efficiency. Due to redemptions throughout the year, a mutual fund typically has capital gains payouts at year-end. ETFs, on the other hand, minimize those capital gains because they do “like-kind” exchanges of stock. This means an ETF does not need to sell shares to meet redemptions.
As for fees, the majority of ETFs have internal expense ratios of between 0.30-0.95% versus the 1% and over found in most mutual funds. ETFs also do not charge advertising fees or sales charges, which are often found in mutual funds.
Another great advantage of ETFs is that they have lower barriers to participation. A person can buy an ETF for a little as one share. Mutual funds typically have minimum investment requirements ranging from $2,500 to $5,000. Like stocks, ETFs trade throughout the day. Mutual funds, on the other hand, trade just once per day, at the close of business. The fact that ETFs trade regularly means investors have greater control and the ability to protect themselves with things such as stop-loss limits.
These advantages are not being overlooked by financial planners, either. A recent report from the Financial Planning Association Research and Practice Institute indicates that nearly 88% of advisors surveyed regularly recommend ETFs to their clients in 2019. (view the report here: https://www.onefpa.org/business-success/ResearchandPracticeInstitute/Documents/2019-Trends_%20in_Investing_Report.pdf
No investment vehicle is perfect, and you should always consult with a qualified professional before making any decisions with your money. However, it’s great to know that the financial services industry is always at work to create alternatives that help consumers grow their wealth safely and sanely while offering better tax efficiency and protection.
If you would like to explore other alternatives to mutual funds, please contact me, and I will be happy to share information to help you make the right decisions when it comes to your particular situation.