ETFs In Mutual Funds? Sure!
August 24, 2012
Mutual funds have to equitize cash, either from inflows or dividends, or just because they sell something and don't see anything in the market they want to buy. They used to buy futures, where margins could climb sky high; now they use ETFs. It allows them to get quick, cheap exposure to the market.
You put the money to work in an index product, and then when you get a better idea, you buy some stocks and sell off that index position. It's the best way to handle "cash management."
And here’s the dirty secret: Everyone does it. In fact, you’ll notice it frequently happens around the last day of the quarter, depending on what inflows, outflows and dividends different mutual funds receive.
The fact that reporters are starting to notice is actually a good sign.
“But what about the extra fees?” you may ask.
In the grand scheme of things, shareholders shouldn’t notice much of a difference. In IWM’s case, the annual expense ratio comes to 23 basis points. That’s not free, but it’s a pretty low fee.
I’d be concerned if a mutual fund only held ETFs, something that’s happened in a few extreme cases in the past. But to my knowledge, these funds don’t exist anymore—likely because investors wised up to what seems to me to be a pretty blatant rip-off.
Mutual funds are still a huge business: $12.17 trillion of the market compared with the $1.2 trillion in ETFs.
And even as more investors move toward ETFs, mutual funds aren’t going anywhere. If anything, this trend of ETF holdings in mutual funds is a good sign: Managers should use every tool available to grow their clients' money, and ETFs are one of the most efficient tools in their belts.
Cory Banks is the managing editor of ETF Report from IndexUniverse. He can be reached at email@example.com.