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The ETF moment?

Greg Carpenter

December 29, 2022


We over here at the Frugal Fiduciary haven’t shied away from our admiration for that nimble investment vehicle, the ETF. Rock-bottom expense ratios, tax efficiency, no loads; what’s not to like?

Not much if you’re a saver but it you happen to work in the mutual fund industry you might be feeling the pressure of increasing competition. Cory Banks of fame documents the push by Charles Schwab to bring more ETFs to the 401(k) universe. (See “Has Schwab Cracked 401(k) Code For ETFs?”)

Mutual funds have dominated the 401(k) industry since its inception and today manage three fifths of total industry assets1. Charles Schwab’s plan to bring a large offering of ETFs to the 401(k) world represent a definite shift away from the traditional mutual fund. This trend has also manifested itself in the online brokerage industry as company after company has expanded their offerings of no commission ETFs.

Now before we get all carried away, it’s important to keep things in perspective. To quote from Banks’ article:

Joel Dickson, principal and senior investment strategist at Vanguard, points out the loss of cost advantage, as well. He says that the largest providers in the 401(k) space "already have pricing power, and can get indexing exposure at a lower cost than even the cheapest ETFs."... And of course, one of the main advantages of ETFs—their vastly superior tax efficiency—is largely irrelevant to the tax-deferred 401(k) investor.

The financial services industry has always been characterized by its dynamism. Evidence of these competitive dynamics can be seen in a 2.5% drop in the average equity mutual fund expense ratio between 2011 and 2012. The Frugal Fiduciary applauds this competition and looks forward to it intensifying.

How far will the ETF advance into the massive 401(k) industry? How low will mutual fund expense ratios go? Drop your comments in the box below and let’s continue the conversation.

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1Cory Banks, “Has Schwab Cracked 401k Code For ETFs?” 24 June 2013