Statistics indicate investors love exchange-traded products.
and ETNs topped $1.3 trillion in assets under management in
December 2012 and the inflows have continued this year.
In February, global exchange-traded products attracted $11.4
billion in assets,
according to ETFGI
Through the end of February, global ETFs and ETPs raked in
$49.1 billion in new assets with equity-based products accounting
for the bulk of inflows with $45.1 billion, ETFGI said. That is
good news for the ETF industry, but there is a cause for concern:
So-called investors are showing some reluctance in embracing
"When asked about their investment preferences in the next 12
months, conservative and moderate investors said they are more
likely to opt for mutual funds (86 percent combined) than more
aggressive investors (54 percent),"
according to Illinois-based Huber Financial
, a financial advisory firm.
The firm cited a recent survey conducted by Spectrem's
Millionaire Corner that indicates investors with moderate or
aggressive risk-tolerance profiles are far more likely to embrace
ETFs than their conservative counterparts.
Arguably, this scenario indicates conservative investors are
not being properly educated about how they can also benefit from
ETFs. Perhaps financial advisors that count risk-adverse
investors among their clientele should highlight examples such as
Consumer Staples Select Sector SPDR (NYSE:
) It can be argued that the Consumer Staples Select Sector SPDR,
the largest staples sector ETF, is among the ultimate options for
conservative investors. With an expense ratio of just 0.18
percent, XLP has annualized volatility just 10 percent and a beta
of 0.63 against the S&P 500,
according to State Street data
By comparison, the Fidelity Select Consumer Staples Portfolios
) charges a whopping 0.83 percent per year, a minimum investment
of $2,500 and a redemption fee of 0.75 percent,
according to the fund's web site
. All of that for a five-year return of nine percent.
XLP has no redemption fee, no minimum investment and offers
intraday liquidity. Over the past five years, XLP has offered
better than quadruple the returns of FDFAX.
Vanguard Health Care ETF (NYSE:
) The health care sector is another favorite stopping point for
conservative, cost-conscious investors and Vanguard certainly
obliges them with VHT. VHT's paltry expense ratio of 0.14 percent
is the lowest among health care sector ETFs.
Said another way, the expense ratio on the Fidelity Select
Health Care Portfolio (
) is more than 5.7 times the fees charged by VHT. And FSPHX
charges the same pesky 0.75 percent redemption fee FDFAX does and
has the same absurd $2,500 minimum investment requirement.
For all those fees, investors get a mutual fund that has
returned just 10 percent over the past five years with a turnover
rate of 105 percent,
according to Fidelity
. On the other hand, the passively managed VHT has offered five
times those returns over the past five years.
iShares High Dividend Equity Fund (NYSE:
) The iShares High Dividend Equity Fund is one of many
U.S.-focused dividend ETFs that compete against the Income Fund
of America (
) issued by American Funds. Owning that mutual fund's "A" shares
cost $632 per $10,000 invested over one year,
according to the fund's prospectus
Maybe some advisors can look past that because the Income Fund
of America is up 11.5 percent in the past year. Maybe the
advisors that feel that way ought to look for a new line of work
because HDV is up almost 13.2 percent in the past year with an
expense ratio of 0.4 percent.
What is even more damning about this comparison is that HDV, a
fine ETF to be sure, is pricier than many of its closest ETF
rivals. For example, investors can nab a WisdomTree or Vanguard
dividend ETF for less than 40 basis points. That is not a
criticism of HDV. Imagine if more investors knew they could use
ETFs to get comparable or superior returns to what the Income
Fund of America offers at a fraction of the cost. That would
probably keep some mutual fund folks awake at night.
For more on ETFs, click
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