Why You Should Use ETFs Instead of Mutual Funds

by | Feb 22, 2023 | Videos

In this week’s video, Tom talks about the reasons you should use ETFs (exchange traded funds) instead of mutual funds.

Lower fees and tax efficiency savings might not seem like a big deal, but these small amounts will add up over time to make a big difference over your investing lifetime. Tom quantifies for investors just how much they can expect to save per year.

If you can get similar exposure to investments with both ETFs and mutual funds, why wouldn’t you go with the one that is going to cost less and potentially save you more in taxes?

Show Notes

4 Reasons to Use ETFs – Mullooly Asset Show

The Secret Sauce of ETFs is Still a Secret – Cullen Roche – Pragmatic Capitalism

70 bps or more – Meb Faber

Why You Should Use ETFs Instead of Mutual Funds – Full Transcript

**Click here for a full downloadable PDF version of this transcript**

Tom Mullooly: The secret sauce of ETFs, exchange traded funds, is apparently still a secret. We’re going to talk about it today.

Welcome to the Mullooly Asset Show, I’m your host, Tom Mullooly, and today we’re going to be talking about exchange traded funds, ETFs.

The secret sauce that’s packed into ETFs apparently is still a secret. Cullen Roche, who is the author of the book Pragmatic Capitalism, and we’ll link to his post in the show notes, Roach wrote an article how when he was a trainee at Merrill Lynch, this goes back 20 years ago to the early 2000s,

20 years ago at Merrill Lynch they only sold mutual funds, they weren’t using exchange traded funds, and so Roach would sit down and compare mutual funds to similar exchange traded funds, ETFs. So he would compare the relative performance, the fees, the tax efficiency, and over and over ETFs would win. They would turn out to be superior investment vehicles.

So Roche asked someone in the Merrill Lynch training program, “Hey, why don’t we just use ETFs instead of mutual funds?” And the answer was always we don’t get paid to sell low cost index funds. I’m going to say that again, we don’t get paid to sell low cost index funds. That was the message at the big brokerage firms, I’m not singling out Merrill Lynch because all of the brokerage firms took the same approach 20 years ago.

But yet over these last 20 years the mutual fund industry has gone from $10 trillion in assets to $27 trillion in assets. Part of that is what the market has returned over 20 years, but the point is people are still buying mutual funds when there may be a better opportunity out there for investors. A lot of people still don’t seem to understand exchange traded funds, ETFs.

We’re also going to link to a tweet from Meb Faber, who’s also in our industry, and he shows how exchange traded funds can add as much as 70 basis points a year. Now sometimes people get confused when we talk about 70 basis points, that’s seven tenths of a percent, so over 10 years that could add as much as around seven percentage points to your total return.

Or as Casey said before we started recording that’s not nothing. So there is a difference, and you can see that in terms of your annual returns funds versus mutual funds.

I spoke with someone just last week, this gentleman owns a fund, a mutual fund, and he owns it in a taxable account. Last year in 2022 the fund lost money. He actually lost a lot of money, but yet at the end of 2022 he got a 1099 showing that he owes $25,000 in capital gains taxes. Again, not nothing, so lost money still owes taxes.

There’s more to that story of course than we can cover in a short video, but the main message is our industry needs to do a better job educating our clients regarding the benefits of exchange traded funds.

It really is in your best interest to take a look at these alternative vehicles. There’s a lot of misinformation, there’s a lot of mystery regarding ETFs, and there’s a lot of people in our line of work who really don’t understand them at all. We’d be happy to talk to you about how they may be able to benefit your investment plan. That’s the message for today’s video, thanks again for tuning in.

 

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