- Jim Bourg/Reuters
Mutual funds have been a standby of retirement plans for decades, helping to provide a less risky vehicle for people to grow their wealth.
“It’s a one-way street,” Faber told Business Insider. “Mutual funds have so much baggage … and are still dominated by active managers, which usually means they charge more. Once you go from a high-fee, tax-inefficient structure to a very low-fee, tax-efficient structure, you don’t go back.”
ETFs are one of the fastest-growing types of investment vehicles in the markets now. Because of generally lower costs than mutual funds, in the past 10 years ETFs have gone from $230 billion is assets to around $4 trillion in early 2016, and it doesn’t seem to be slowing down.
Mutual funds, however, are still much bigger, with nearly $16 trillion in assets, according to industry group Investment Company Institute.
Faber, in his mind, believes that ETFs can take the place of mutual funds, and that by 2020 more assets will be held in the former than the latter.
The issue holding back the switch isn’t necessarily people more interested in mutual funds, but simply the institutional inertia in investing. Here’s Faber:
There’s a stat, the average financial adviser that’s been in business for at least 10 years owns something like 200 different mutual funds across his clients. Because someone comes in and sells it, and he says, “Oh, that’s a good idea,” and he puts it in some client accounts, forgets about it, and never sells it until that client either dies or moves … You end up with mutual-fund salad because they have so many funds they don’t know what they have.
Eventually, Faber said, the shift will occur.
“So it’s somewhat of a generational process because mutual funds are sold,” said Faber.
It’s a one-way street and it’s not going to happen. I mean, it is happening this month, this quarter this year, but the real transfer is not until our parents and grandparents either die off or pass along assets, those get sold and no one goes back to paying 2% [in fees]. We think it’s a trend that will continue.
While there has been some criticism of ETFs – some worry that they distort or dry up liquidity in the underlying markets – Faber doesn’t think there is necessarily a problem with the vehicles.
“If $10 billion goes into high-yield bonds, then that, by the very nature of flows, is going to change the asset class but not in a necessarily bad way,” said Faber. “At the end of the day, [ETFs] are still just a structure, so who knows – maybe someone will come along and invent a new one. But we think this is a pretty good one right now for most asset classes.”
Mutual funds are dead.