|
|
Given the increased popularity of exchange-traded funds (ETFs), you would think that index investors have fallen in love with this investment vehicle. Even though ETFs have only been around since 1993 (whereas the first index mutual fund was introduced in 1975), by the end of 2004 their total net assets amounted to almost half those of index funds (see Table 1). However, a closer look shows that index funds are still the top choice for the majority of retail index investors. Here we will look at the reasons why ETFs have become so popular and analyze whether they make sense - from a cost, size and time-horizon standpoint - as an alternative to index funds.
Table 1 - Comparison of types of funds |
Many articles have been written comparing ETFs to index funds, but not much has been written on quantifying the differences to determine when one makes sense over the other. (For an overview of both investments, see Introduction to Exchange-Traded Funds and The Lowdown on Index Funds.) In an article entitled "Index Mutual Funds and Exchange-Traded Funds", published in the Journal of Portfolio Management in the summer of 2003, Leonard Kostovetsky actually quantifies those differences by looking at the explicit and implicit costs inherent in both ETFs and index funds.
Comparing the Advantages
Because ETFs are flexible investment vehicles, they appeal to a broad segment of the investing public. Passive investors and active traders alike find the features of ETFs attractive. (To learn more see, Advantages Of Exchange-Traded Funds.)
Passive institutional investors love ETFs for their flexibility. Many see them as a great alternative to futures. For example, ETFs can be purchased in smaller sizes. They also don't require special documentation, special accounts, rollover costs or margin. Furthermore, some ETFs cover benchmarks where there are no futures contracts.
|
|
|
|
•