The gap between mutual funds and ETFs could vanish in 10 years — and the real battle will begin
The downward trend in investment fees saw two significant developments in the last couple of weeks. In the US, Fidelity Investments launched two index mutual funds with no fees. Here in Canada, Horizons released the country’s first 0% management-fee index ETF portfolios.
In the case of the Horizons portfolios, investors would still indirectly pay management costs for underlying ETFs held; the total MERs aren’t expected to exceed 0.18%. But even if it’s not truly fee-free, it’s undoubtedly an added draw for investors — and another source of pressure for active managers.
“The passive managers have done a great job shifting perceptions toward fees and the active managers have been on the outside looking in trying to justify their own value proposition,” said Jason Vincent, president and chief operating officer at Matco Financial. “I can tell you it’s getting harder and harder for the world to talk about active investment management as the value of risk and performance seem to have been overshadowed by fees.”
According to Vincent, even the conversation around risk and performance among active managers has given way to focus more on fees. And while he stressed that price is just one piece of the value proposition, the current gap between passive and active products in general is just too hard for clients and their advisors to ignore.
But thanks to advancing financial technology, active managers have a chance to stage a fee comeback. The NAVEx platform, launched by the TMX Group in 2016, presents a chance for mutual-fund manufacturers to get on even footing with ETFs.
“Matco is one of the first manufacturers on the NavEx platform because it’s a great way for us to even the playing field and compete against ETFs from a fee and accessibility perspective,” Vincent said. “Funds currently have to go through FundServ, but we’re looking to lower some of the operating costs and increase accessibility by putting the funds on an exchange, just like ETFs.”
He said putting funds on the NAVEx platform has allowed the firm to reduce operational costs; with the savings, Matco Financial has been able to cut the funds’ fees in half. That places fees at a lower price point than what one would expect for active ETFs.
“Essentially by neutralizing fees, the value proposition will shift back to risk and performance, which is a great opportunity for Matco as our funds have been very strong performers,” Vincent said. Case in point: according to Morningstar Research, the Matco Small Cap Fund was the top-ranked fund in Canada in its respective category over the past year ending June 29.
Another overlooked advantage of the NAVEx-traded funds over ETFs, he said, lies in transactional costs. ETFs have bid-ask costs which can be significant whenever they’re bought or sold; clients, in effect, get clipped on both sides when their advisor trades in ETFs. Mutual funds, on the other hand, are bought based on the NAV every day.
Of course, given people’s habituated tendency to invest on a “set it and forget it” basis using passive funds, such transaction costs haven’t weighed heavily on their minds. But as rising trade tensions and other economic events signal the end of a peaceful boom cycle, risk and volatility will re-enter the investing conversation — and recast active management in a more favourable light.
“I think within a decade, the gap in pricing between active and passive will be much narrower, assuming it’s still there,” Vincent said. “Once that happens industry-wide, performance and risk will be more than blips on investors’ screens.”
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