By Christian Magoon
CEO, Magoon Capital
As the world continues to advance its ability to communicate and process information more efficiently, investors are increasingly finding themselves in markets operating at a blistering pace. Data points as unique as comments from a European banking official to a tweet about the latest Apple (AAPL) offering can spur meaningful market moves. Investors today don't think twice about market benchmarks rising sharply in morning trading activity only to see declines in the afternoon. So where do ETFs and mutual funds fit in this dynamic world? These vehicles are the most widely owned packaged products by investors but do they provide investors with an edge?
As markets become more dynamic investors find themselves reassessing their investments more often. In order for investors to be able to properly assess their investments, they need to know what they own. Understanding a portfolio's holdings is the key to more precise asset allocation and risk management. While this seems basic, too many investors in packaged products don't really know what they own. Why? Mutual funds are still operating on a dated mandate to disclose holdings just once a quarter. While some funds do so more frequently, most follow the minimum disclose requirements. For investors, this is the equivalent of reading the news just once every three months and making investment decisions based on that information. Perhaps that's why ETFs, which overwhelming disclose their holdings on a daily basis, are becoming a staple for many investors. Transparency - as much as possible - gives investors the criteria to make informed decisions in a market environment becoming more dynamic.
Investors across the board - from real estate to stocks - value liquidity today more than ever before. The ability to buy or sell an investment had once been taken for granted, but the financial crisis has demonstrated that liquidity is not something to be taken for granted. Liquidity offers flexibility for investors to become more defensive or offensive. As markets speed up, these portfolio adjustments can be crucial.
When it comes to liquidity, ETFs and mutual funds take separate approaches. ETFs provide investors with the ability to make adjustments intra day while mutual funds do so only at the end of the day. Decades ago this difference may not have been material for most investors, today it continues to become more important. As mentioned before, material intra day market swings are common place today. Thus there is an increased form of risk that investors can face when buying and selling a fund - time. The longer it takes for a buy or sell to occur, the greater the risk the market order is executed at a price that is not as the investor intended. Thus placing a mutual fund buy or sell order and then waiting until the close of markets to receive pricing exposes investors to pricing risk. This is especially true in comparison to ETFs, which offer second by second exchange traded pricing, thus reducing the risk of poor or even an inverse pricing outcome.
In a fast paced investment world, transparency and liquidity allow investors to better understand their portfolios and effectively plan for the future. ETFs, in comparison to mutual funds, provide investors with timely information and greater flexibility to act on it. These advantages will continue to increase in value alongside the speed of the investment marketplace.