Access to Alts
Mutual funds and ETFs may provide a convenient, less expensive and more transparent vehicle for individual investors to gain exposure to alternatives.
Characteristics of mutual funds and ETFs
Access—ETFs and mutual funds are available to the general public, and though there are usually certain investment minimums set by the fund, these are typically less than hedge funds. ETFs must be bought through a broker, while mutual funds can be bought directly from the fund company or from a broker.
Fees—Mutual funds, on average, have an annual expense of 0.99%¹, while ETFs have annual expenses that average 0.57%², plus any brokerage fees. Certain fees for both ETFs and mutual funds are regulated by federal law.
Investments—Mutual funds and ETFs generally make direct investments in stocks, bonds and other securities. Use of leverage, shorting and derivatives is limited by regulation.
Liquidity—Mutual funds and ETFs offer the opportunity to trade in and out of shares on a daily basis.
Performance—The goal is for performance to correspond to a certain index or to provide alpha. Both ETFs and mutual funds typically make performance information available daily.
As with any investment, when investing in any mutual fund or ETF, it is important to thoroughly investigate and understand the investment objectives, strategies, fees, risks and expenses. All of this information is available in the prospectus. Investors should also be familiar with the fund manager’s track record and reputation.
When investing, it is important to have realistic expectations. It is tempting to think that alternatives will guarantee enhanced results, but this is not necessarily the case. As with any investment, there is the potential for up and down days.
Pricing—Most mutual funds are priced once a day, giving investors a clear value of their investment. ETFs are priced throughout the day on an exchange just like a stock, though their value may trade above or below the value of the underlying portfolio.
Regulation—Mutual funds and ETFs must register with the SEC, which actively regulates their structure and operation. All funds must publish a prospectus and Statement of Additional Information (SAI) containing specific information about the fund’s management, holdings, fees and expenses and providing transparency to investors.
Taxes—With a mutual fund, investors pay taxes on any ordinary dividends, personal capital gains when you sell your shares and possibly on the fund’s capital gains. An ETF’s taxes works similarly to stocks. Investors pay income tax on any dividends and interest and pay capital gains for any profits when the ETF is sold.
Transparency—ETFs generally provide their holdings daily, while mutual funds do so at least quarterly.
¹ Source: 2009 Investment Company Fact Book
² Source: Morningstar, as of 12/31/2009
