Did you know that the first modern-day mutual fund was created nearly a century ago in 1924? Today, US mutual funds hold $18 trillion in assets, and it's no secret that US investors love their mutual funds.
But... there is a Millennial in town, and it'll be celebrating its 28th birthday this year. It's called the ETF (short for an exchange-traded fund). It offers several advantages that a mutual fund cannot match, and some would say is the future of investing. Let's take a closer look.
ETFs disrupted traditional mutual fund fee structure
The first barrier ETFs had to overcome was the lack of load and distribution charges, which traditional Financial Advisors historically heavily relied on to get comped. But the reality has since changed. These days, financial advisors increasingly avoid shares that contain sales and distribution charges, favoring instead institutional classes of mutual funds and ETFs.
ETFs' tax-advantage and tradability are key features mutual funds can't replicate. While distributing income similarly to mutual funds, ETFs create and redeem shares "in kind," which reduces capital gains. And you can trade them any time during market hours just like stocks!
Fast & furious innovation
At first, ETFs were exclusively passive stock funds fully replicating a market index. Over time, they've broadened to other asset classes, sectors, weighting methods, and now actively managed options. In fact, the fastest-growing ETFs are actively managed—think ARK funds. Even mutual fund stalwarts such as Capital Group, the parent company of American Funds, are now getting into the ETF business.
Trading powerhouses on the street—Robinhood and Public—don't even offer mutual funds
Millennials and Gen Zs are not even thinking about investing in mutual funds unless it's within the confines of their retirement savings accounts. In the foreseeable future, mutual funds will remain a mainstay of 401(k) plans, because 401(k) recordkeepers still can't figure out how to handle ETFs. But the direction is clear—ETFs are taking over!