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Thursday, January 17, 2013

Will Active ETFs Save the Stock Fund Biz?

News summary by MFWire's editors

Active U.S. stock mutual funds haven't seen net yearly inflows since 2005. Will active ETFs turn that exodus around? Jason Kephart of Investment News offers that theory.

The trade publication notes that Columbia, Fidelity, Franklin Templeton, Janus and Legg Mason, all big stock mutual fund players, are working on active ETFs. Columbia has even filed for active stock ETFs. And InvestmentNews also notes the success of Pimco's ETF version of Bill Gross' flagship mutual fund. The active ETF version of Gross' fund is about one-third cheaper than the original mutual fund.

"If active stock ETFs had similarly lower fees, it could make a big difference in performance," Kephart writes. "With fee cuts similar to Pimco's, the average active stock ETF could charge somewhere in the range of 80 basis points. With those cuts, a number of active managers would have generated benchmark-beating performance last year."

Yet the article does not mention why ETF fees are often lower than mutual fund fees. When buying a stock or ETF, but not when buying a regular mutual fund, investors have to pay a trading fee, and thanks to the bid-ask spread the share price they buy or sell at may not be as favorable as they hoped. And while investors can buy mutual funds, directly or through intermediaries, and have the mutual fund fees pay for the account that holds their shares, ETFs separate out those costs, too. Just like when buying stocks, investors often have to pay for the account that holds their ETFs. 

Edited by: Neil Anderson, Managing Editor


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