Here’s How Exchange-Traded Funds are Shaking up Investing

Here’s How Exchange-Traded Funds are Shaking up Investing

The explosive growth of exchange-traded funds is not a new phenomenon on Wall Street. Over the past 10 plus years, ETFs have seen assets rise to nearly $5 trillion while raking in nearly $300 billion in inflows in 2016. Some analysts believe they could represent almost 60 percent of all U.S. investments over the next 10 years. Although largely unnoticed by average retail investors, ETFs are shaking up Wall Street and the investment world.

Overtaking Mutual Funds Some analysts believe that ETFs could surpass traditional mutual funds in the next couple of years. Since the value of ETFs rise and fall based on an entire exchange rather than a basket of investments, analysts speculate that many average investors will start to buy ETFs for passive income rather than mutual funds.

Most of the new investment money in the U.S. now goes to ETFs. Additionally, Hector McNeil of HanETF said that ETFs could reach $7.6 trillion in value by 2020. While some say that 2020 might be a little early, they do acknowledge that a total takeover of

mutual funds is inevitable. ETFs are less expensive in terms of fees and overall tax efficiency, and some ETFs offer generous returns during market downturns.

Hedge Funds on Alert The rise of exchange-traded funds has many hedge fund managers on high alert. Some analysts feel that ETFs will take a big slice out of hedge fund revenues. ETFs passed hedge funds in terms of size in 2015, and as of 2016, ETFs manage over a $1 trillion in assets when compared to hedge funds. Additionally, ETFs are far less expensive than actively managed hedge funds.

Some hedge funds are now taking measures to combat the threat of ETFs. Instead of restructuring their investment philosophies and fees, some funds are now offering their own ETFs. However, many new exchange-traded funds now offer strategies that mimic the strategies of hedge funds, and some even offer computer trades that simulate the trading styles of the most successful funds at a fraction of the cost. Analysts point out that many computer trades often outperform hedge funds that are actively managed by humans.

The bottom line is ETFs cost much less than hedge funds and mutual funds. They also offer the perks of trading like an individual stock where investors can buy and sell intraday. Mutual funds are priced one time per day at the close of business, which all but eliminates investors from trading based on short-term market movements.

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