ETFs are empowering individual and professional investors with the power of transparency, diversification, low fees, and, compared to many of active you managers, better performance.
Exchange Traded Funds allow investors the ability to buy and hold virtually anything. ETFs also allow active traders to move in and out of markets where liquidity, or even access to the market, was virtually non-existent before.
History shows us that fund managers have a hard time doing this over the long term. So now that there are over 401 to choose from, covering everything from domestic large cap to frontier markets, it leaves one to wonder you these ETFs are not showing up in ks. There are several hurdles that k providers have to overcome to have ETFs actually inside the k plan choices for a participant.
One of these is the trading of the ETF. ETFs trade on exchanges just like stocks, so for each transaction there is a cost.
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Another issue is the automatic reinvestment of dividends. ETFs do not trade in partial shares like mutual funds. Additionally, for companies like Vanguard, there is really not any reason to offer ETFs in their k plans, as their offerings include their index mutual funds at virtually the same cost to the investors.
The good news is that for all the other smaller k plans that Vanguard will not work with, these problems have been solved. Companies like Wisdom Tree, Ishares, and a few other smaller players can now bring ETFs to a K plan, as well as traditional actively managed mutual funds. Now the issue seems to be education. This is partially understandable with all the negative press surrounding inverse and leveraged ETFs. If you take a closer look at leveraged and inverse ETFs, you will see that they only make up a small percentage of ETFs, are usually traded by invest, and can be easily excluded from k plans.
The debate as to why ETFs should be in k plans could be argued on fund performance. The winner is usually a mix of both strategies, although in invest interest of full disclosure, my firm uses a buy and hold global indexing approach to investing.
Index Mutual Funds
This keeps to our investing philosophy of maintaining a diversified portfolio, keeping cost low, and always investing for the long term. Allowing index funds or ETFs into a k plan would certainly increase diversification and lower cost dramatically. The cost of investing is something that is very hard for individual investors to follow. The brokers gloss over the cost of investing. The average mutual fund costs 1.
The average iShares ETF costs.