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Mutual Funds: Portfolio Structures, Analysis, Management, and Stewardship by John A. Haslem, Ph.D.

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CHAPTER 14
Mutual Funds versus Exchange-Traded Funds
GARY L. GASTINEAU Managing Member, ETF Consultants LLC and Managed ETFs LLC
 
 
 
The phenomenal growth of exchange-traded funds (ETFs) is a frequent topic in the financial press. Most of the press coverage has correctly noted some of the major advantages of ETFs: lower costs than mutual funds, intraday trading without material premiums or discounts to the funds’ intraday net asset value (NAV), and high tax efficiency. However, there is a fair degree of misunderstanding about how ETFs work, why the expense ratios of most ETFs tend to be low, and how most ETFs manage to avoid significant capital gains distributions. This chapter attempts to answer these and other questions frequently asked about ETFs. We also suggest that the ETF investment company structure should replace the conventional mutual fund structure for most new fund investments by U.S. investors in the years ahead. Much of the material in this chapter is drawn from the author’s earlier writings, especially Gastineau (2001, 2002b, 2005) and Broms and Gastineau (2007).

A BRIEF HISTORY OF ETFs

Exchange-traded funds, referred to by friends and foes alike as ETFs, are outstanding examples of the evolution of new financial products. We begin by tracing the history of ETF antecedents—the proto-products that led to the current generation of exchange-traded funds—and set the stage for products yet to come.

Portfolio Trading and Stock Index Future Contracts

The basic idea ...

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