Due to low fees and the ease of buying & selling, Exchange-Traded Funds (ETFs) have developed an excellent reputation amongst small investors. In fact, many people are cashing in their mutual funds to purchase ETFs through discount brokerages (such as E-Trade, TD Waterhouse etc.).
To compete, the mutual fund industry has retaliated with perhaps the most senseless investment product created in years – the Exchange-Traded Fund Mutual Fund.
Traditional Exchange-Traded Funds (ETFs) are similar to mutual funds. Each ETF is actually a “basket” of stocks, so by purchasing a single ETF you make a small investment in several companies. For example, if you buy stock symbol ZEO (A Canadian Oil and Gas Index Exchange-Traded Fund), you purchase a portfolio of common shares of Canadian oil and gas companies. ETFs are therefore a great way for the small investor to diversify.
There are 2 major things that make ETFs superior to mutual funds. 1) ETFs can be bought or sold at any point in the day, instantly, just like a stock. In contrast, mutual fund prices are determined only at the end of the day, and require 1-3 days for processing. 2) ETFs have lower management fees than mutual funds - sometimes much lower.
An Exchange-Traded Fund Mutual Fund (ETFMF) is basically a basket of ETFs, put together to form a mutual fund. That is, you take stocks from several companies and put them in a portfolio, then take several of these portfolios and put them in a portfolio, and the result is an “ETFMF.” With an ETFMF, you get all the disadvantages of a mutual fund with none of the benefits. You pay the high fees of a mutual fund, except now in multiple layers (since you pay the ETF fees, and then mutual fund fees on top). And, you cannot buy or sell them in the market like real ETFs, since they are actually mutual funds.
The reason ETFMFs were created, from what I can tell, is to satisfy naive customers who don’t really understand what an ETF is. Now, customers can ask a mutual fund salesperson, “Do you sell ETFs?” and the salesperson can answer “Yes.” Other than this, I see no benefit to them whatsoever.
If you want to buy a mutual fund that is similar to an ETF, buy an Index Mutual Fund, which is also a basket of companies and has low fees. If you want to buy an ETF, buy a real ETF. ETFMFs are a hybrid product that someone dreamed up in a back room, and have no place in your portfolio.
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“It’s likely that some don’t even know that these fees are being deducted from their funds or who they are ultimately compensating.”
SEC Chairman Mary Schapiro, regarding mutual fund fees.
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