Why are ETFs becoming more popular in 401(k)s?

By MBA, CFP® - Chief Executive Officer, Vernon C. Sumnicht on June 24, 2014

Vern Sumnicht recently responded to a 401(K) LinkedIn Group discussion. We thought we’d share his thoughts/reaction to this question directly here on the iSectors blog:

Why are ETFs becoming more popular in 401(k)s?

  1. Regular underperformance.  If 401(k) participants review the mutual funds in their portfolios, they will usually find consistent underperformance vs. the funds’ index.  Therefore, why pay a mutual fund manager when you can buy an index ETF, save the money and outperform.
  2. Costs.  Because the typical ETF is index-based and not actively managed, in addition, the way ETFs are structured, both reduce fees.  It may seem that fees are relatively small numbers but they really add up in a 401(k) plan when you are investing for years and years and years.
  3. Transparency.  Mutual funds have a habit of changing managers, changing objectives, and most importantly, changing investments regularly.  For the most part, these changes are not announced by the fund company.  However, when you buy an ETF, you always know what you own.  The holdings of any given ETF are easy to locate, are posted daily and there are no secrets or surprises.
  4. Diversification.   Like mutual funds, ETFs are a basket of stocks; therefore, you are not guessing on which individual companies or industries might be the winner.  You can buy an ETF that represents an entire sector or asset class and spread your risk around.
  5. Ease of Use.  Information about ETFs, their holdings, the weightings of each holding, their expenses, charts and etc. are readily available and simple to understand.  It doesn’t mean ETFs don’t require some education, but the education is easy to acquire.

With that said, corporate sponsors of 401(k) plans are fiduciaries.  As more and more sponsors and their employees become aware of the advantages ETFs offer, is it any wonder why ETFs are becoming and will continue to become more prevalent in 401(k) plans?

You can click over to this discussion here (if you are member of the 401(k) Group on LinkedIn) and add your own comment or respond to Vern’s. You can also email your comment to: [email protected] (we are in the process of adding a comments section to this blog).


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