ETFs Vs. Mutual Funds
Index investing is considered to be passive, and as such, is usually inexpensive. There is little turnover and not much trading to pay for. ETFs, which have become the principal vehicle for index investing, enjoy tax advantages. The growing recognition and popularity of ETFs, combined with their lower fees, is challenging mutual funds for investors' attention. While one part of the challenge is the ease of trading ETFs through any broker, the bigger part is the fee. Typical ETF fees run from 20 to 75 basis points; typical mutual fund fees start off where the ETFs end and could rise to 200 basis points or more, in a few cases. Index mutual funds, with fees closer to ETF levels, may sit out this battle, benefit from the interest in ETFs and indexes or maybe even convert to ETFs over time.
Fees matter. In the 1990s, when the S&P 500 could return 15 percent, 20 percent or more in a technology-driven year, few cared about giving a fund manager an extra 50 basis points. Those days are gone. Single-digit annual performance is the norm in most markets, if the numbers manage to be positive. Those extra 50 basis points count, and investors are likely to be the beneficiaries of increasing price competition.
No Growth Markets
The last candidate for the next big thing might be a little thing—slow growth, with little performance and low returns. It is difficult for profits, earnings or stock prices to consistently grow faster than the economy. GDP growth puts an upper bound on growth across the economy. Maybe not day by day, quarter by quarter or even year by year, but in the long run, either profits swallow the GDP or GDP growth is a ceiling on profit growth. Foreign economies and outsourced operations may look like an escape, but that merely substitutes 7 percent real growth in China for 3 percent real growth in the U.S.—and even with 7 percent growth it takes 10 years to double your money. From the end of the 1981-82 recession and the great inflation of the 1970s to the collapse of Bear Stearns and Lehman Brothers in 2008, U.S. investors mostly enjoyed a quarter-century of incredible returns. The next big thing we really don't want may be learning to love slow growth and low returns.
These ideas don't come close to exhausting the possibilities for the next big thing. While paper and ink (or electronic bits) are cheap and one could go on to list others, the probability of getting the next big thing right isn't likely to increase substantially with another few ideas.