“That’s important in volatile markets because you want to know what you own so that you know where you are vulnerable. With mutual funds you don’t know what you own until it’s usually too late.”
He suggests that level of knowledge of a client’s exposure to Canadian bank stocks, for example, would be in short supply were a mortgage crisis to occur, causing the stock’s value to drop. “You would have to guess your exposure,” says Yamada.
That kind of analysis has traditionally rubbed “mutual fund” advisors the wrong way, but a surprising number tell WP that they see the market moving in the direction of ETFs and they are actively tweaking their own models to accommodate those clients looking for a fee system.
Those commission advisors are also conceding that the enhanced liquidity of ETFs is another feature attracting their customers.
“There is less liquidity in a mutual fund than an exchange-traded fund,” says Tabet. “ETFs have intra-day liquidity, which means I can buy and sell it during the day, whereas a mutual I can only buy and sell once a day, at closing.”
Still, they also point to enough potential disadvantages to ETFs — intraday pricing issues, unfavourable bid-ask spreads, the higher management costs for ETFs over regular stocks, etc. — as support for the idea that mutual funds will continue to offer a fair return for their clients even with or without the loss of embedded commissions and the typically higher MERs of mutual funds.
Yamada may not buy it.
He points to the early adopters of ETFs — CEOs of major companies who felt they were the cheapest, most cost-effective way of getting access to broad markets.
The same will happen with advisors and wealth management professionals, he predicts. Still all may not be rosy in the ETF future Tabet sees. It’s why wealth professionals have to work more diligently to make these funds easier to understand and have to do a better job of educating clients, he says.
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