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ETFs are Glorified Mutual Funds

Monday, September 21, 2009

ETFs are Glorified Mutual Funds

Did you every here of a time when history repeated itself?
It happens all the time. Does anyone remember the many transfers of hegemonies in history? This basically means the dominant world power at a point in history and the transition periods from one dominant society to another have similar circumstances throughout time, War. Let’s make a quick side trip before we get into Mutual Funds vs. ETFs.

If you recall some of the greatest wars have occurred during a state of changing dominant nations. For example, the USSR and the USA fought the Cold War (1945-91) for global hegemony. Other hegemonic transitions occurred with Wars as well: Egypt and the Roman Empire, The United Kingdom and France, etc. A new battle is brewing for world control between China and the USA.

Now, back to mutual funds and ETFs:

Mutual Funds, according to, are investment vehicles made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market funds, and similar assets. Mutual Funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the investors.

It has been stated by many in the media that the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of assets which would be next to impossible to do with a small amount of capital. The main downside has been displayed by the overwhelming lack of performance that mutual funds have achieved compared to the general return of the market they are benchmarked against: NYSE, TSX, Nasdaq, Russell, etc. Further, it is common knowledge that mutual funds charge management expenses ratios (MER) against the total asset value in the fund; if the fund does well or poorly the fund manger still takes a percentage.

Over more recent history, the biggest complaint from investors about mutual funds has been their divergence in performance versus the index they are benched marked against. The second complaint has been the front or rear loaded fees charged for selling out the position.

Just a few short years of bad press and wala…ETFs are born.

Exchange Traded Funds (ETF), according to, are securities that track an index, a commodity or a basket of assets like an index fund, but trade like a stock on an exchange. ETFs experience price changes throughout the days as they are bought and sold.

According to Investopedia, because ETFs trade like a stock the Net Asset Value (NAV) is not calculated every day like a mutual fund.

By owning an ETF, you get the diversification just like a mutual fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is lower expense ratios compared to mutual funds because they are not as actively managed.

Let’s get real now though. Under those fancy window dressing definitions is the same investment vehicle. There were many mutual funds that tried to just mirror an index the same way ETFs do. Thanks to the many lazy mutual fund managers out there or maybe we could call them geniuses, many mutual funds bought baskets of stocks/assets that would provided the exact same return as the market index. Some of them even lowered their expense ratios because these funds took a lot less time and energy to maintain.

It’s not rocket science. It’s just like going to the ice cream parlour and ordering Chocolate-Chocolate ice cream instead of just plain old Chocolate. It’s all smoke and mirrors and the financial community is famous for implementing the same things over and over and never learning from mistakes of the past.

Just because you can short an ETF doesn’t mean it’s any different. You could have bought a mutual fund that shorts the market.

Just because you ETFs are designed to track an index dosn't mean it's any different.  Anyone remember Index funds?  Index funds are mutual funds designed to track different indexes.
Just because you can short an ETF that shorts the market doesn’t mean it’s any different. That’s a double negative that gives you the same return as buying the ETF or mutual fund that is not shorting the market.

The only real difference is that you buy and sell throughout the day, but that doesn’t make it a different flavour.

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