Chart: Savings in Expense Ratio

Everything Is Relative said Albert Einstein. In stock markets, this is done by way of Bench marking our performance against another Portfolio. In the United States, ETF assets have grown at a compounded rate of 25% in the past decade as investors have shifted big time from Active Funds to Passive driven by consistent under performance by Active funds against the Benchmark Indices.

While the flow into ETF’s in the US is into the Top 500 stocks, in India much of the flows is into the Top 50 stocks. Having said that, the interesting data point to not here is that the returns of Nifty 500 since its Inception actually matches that of Nifty 50.

The biggest advantage of Passive is the savings on Fees which over time can be a huge. If you were to start your investment journey and save say a Lakh of Rupees for Retirement per year and add another Lakh per year which goes up by 6% every year, this is the difference between paying 0.10% or 1.25%  which is the approximate average of Direct Mutual Fund Fees versus Regular Mutual Fund Expense Ratio which is around 2.25% over a period of 30 years.

The differential itself is pretty incredible. Where is paying 3.60 Lakhs versus paying 45 Lakhs or 81 Lakhs. If you are investing in Large Cap funds, it makes very little sense to invest into any Mutual Fund and yet the truth is that 20% of Equity Mutual Funds are Large Cap oriented.

While on Twitter we find a lot of ETF warriors, the issue lies with the fact that financial products are more of a Push Product than Pull. This means that some-one has to paid to sell mutual funds or ETF’s or Insurance or for that matter any other product that asks for your savings.

ETF’s despite their growing popularity are an abandoned child. The biggest advantage of Mutual Funds lie in not just their commission model that allows others to benefit from the sales but also the fact that there is a fund manager who you can point fingers to in case of under-performance.

In case of the ETF, there is none other than maybe a couple of Fee only Advisors.

I am done with actively managed funds. It is not my job as a financial planner to try to beat the market. Risk can be managed at asset allocation level.

— VivekTaru (@kendheswapnil) January 26, 2020

With RIA’s rules getting changed in favor of the big boys, I doubt this shall change. The benefits will be limited to the few while the majority will continue to pay a higher fee for a inferior product that serves them better neither on Return or on Risk.