ETFs are cheap and tax friendly. Mutual funds are also getting the bad name now with mismanagementetc. Does ETFs have the potential to attract large chunk of the money from mutual fund industry in short tomedium term. Is the great success of QQQ, DIA and SPY a pointer to what may happen to ETF/mutual fund sector?There can be major implication for traders, money managers if large money start flowing to ETFs. Any thoughts on theseissues?

Mutual funds is all about sales. You get some schmuck at some bank selling Mrs. Robinson hard on, say, the Vanguard Fund. He only cares about his commissions. ETFs don't really pay commissions. Unfortunately for Mrs. Robinson, her life's savings end up going down the drain on some superbly ill-managed fund (sorry, that sort of shit really pisses me off).The implications for traders, if mutual funds stopped trading in and out and simply started a complete replication, there would be less volatility, I'm reckoning. It's hard to judge these things in advance, because there are many effects. I may turn out that mutual fund trading actually provided enough liquidity so that volatility due to illiquidity was reduced. I'm quite pragmatic in this.. only time will tell.My guess is, the poor Mrs. Robinsons of the world are going to continue to get suckered into mutual funds. It's about sales. How many people have insurance they don't need? Why do they have them? Sales.Just my Bund Dec 03 116.50/117.00 Call Spread. (0.06-0.04=0.02)

While I agree with FDAXHunter's spirit, he picked the wrong example with Vanguard. Vanguard runs low-cost mutual funds and does not pay commissions to salespeople or brokers. If you buy the fund directly from Vanguard you pay only the management fee and the management company is owned by the fund so any excess fees are captured by fund shareholders (I consider this the only honest way to run a mutual fund). If you buy a Vanguard fund from a broker, the broker may charge you a commission, just as if you bought an ETF. But for other mutual fund companies, FDAXHunter's criticisms apply.However, ETF's have no immunity from bad mutual fund practices. They can charge high fees and engage in related-party scams. Whether individual investors buy and sell shares directly with the fund or trade with each other, the basic economics and organization are the same.For many years now the money in mutual funds has been in distribution. Companies compete not by having better management performance but by having better customer service. If you put all your money in Vanguard or Fidelity funds you get nice-looking statements, timely and easy-to-understand tax information, easy to use analytics and user-friendly transaction processing. If you open a brokerage account and trade ETF's, you're on your own.ETF's have great advantages for traders, you can execute intraday and use limit orders. Mutual funds are more convenient for long-term investors holding a portfolio of funds. Each one has to be evaluated on fees and performance, there is no general advantage. You won't get rich starting either kind of fund, but you might get rich selling them to other people.

QuoteOriginally posted by: samudraETFs are cheap and tax friendly. Mutual funds are also getting the bad name now with mismanagementetc. Does ETFs have the potential to attract large chunk of the money from mutual fund industry in short tomedium term. Is the great success of QQQ, DIA and SPY a pointer to what may happen to ETF/mutual fund sector?There can be major implication for traders, money managers if large money start flowing to ETFs. Any thoughts on theseissues?It's amazing how your prose changes from post to post

Aaron,The way I see it is it is very difficult to beat ETFs in pricing. I have a feeling that ishares do have the potential to make big dent to the MF industry. Given the enormous size of the MF industry this can mean a paradigm shift in investment.Some of the MF highfliers of the dotcom era( I am not taking names but we all know whothey are) may get whacked in next few years.

QuoteOriginally posted by: samudraThe way I see it is it is very difficult to beat ETFs in pricing.I have not seen any numbers on the net costs of ETFs to the investor. Does anyone have any data? There must be administrative fees, management fees, and execution costs at the fund level as well as the commissions and other account service fees incurred at the investor level. As Aaron explains, Vanguard is very low cost and their are both active and passive vehicles to choose from.

QuoteOriginally posted by: FDAXHunterMutual funds is all about sales. It seems we all agree on this point. I think it is also worth pointing out the huge underbelly of creative accounting that is now coming under the regulators gun. With a bit of inquiry, one can rather quickly find out the upfront (or backend) sales charges, but where is the transparency on operating costs? It is all muddled up in soft-dollar commissions and other clever tactics. I am eager to see what the UK regulators decide on this one. Whatever they conclude...it can't be good news for the likes of Fidelity or their friends on the sells-side!

QuoteOriginally posted by: dcQuoteOriginally posted by: samudraThe way I see it is it is very difficult to beat ETFs in pricing.I have not seen any numbers on the net costs of ETFs to the investor. Does anyone have any data? There must be administrative fees, management fees, and execution costs at the fund level as well as the commissions and other account service fees incurred at the investor level. As Aaron explains, Vanguard is very low cost and their are both active and passive vehicles to choose from.1) Creation and redemption cost are included in the bid/ask. So when MM is matching orders he is collecting the C&R cost from customers for doing nothing. Plus the commisions.2) Less liquidity will add to the cost3) Interesting section on TAX Efficiency at http://www.indexfunds.com/articles/2000 ... eh_JN.htmI think it's more about control over retail investors by Sell Side by using ETF then Buy Side.End of the day Mr. Robinson will pay same cost either in form of Mgmt fee to a fund or commisions + other cost + ETF mgmt cost to Sell Side.Plus by giving R.I these control would add more volatility and volume. good business for Sell Side.Remember Tech boom: Tech killed itselfTech provided access to real time prices and market to retail people a stage where avg investor thght they can dance , analyst played good music, Sell side sold all the ticketsand made a good fuckin show out of it and made all the money.B.T.W unfortunately I am on SS

ETF fees are similar to the low-cost quartile of mutual funds. The cheapest ETFs are S&P500 ones, because they are in a war with Vanguard S&P500. SPDRs charge 0.12% versus 0.18% at Vanguard (but of course you can buy or sell the Vanguard with no commission, while you pay a stock commission for buying or selling SPDRs; and Vanguard provides customer services like a website, cash transfers and tax reporting). Typical ETFs are 0.35% to 0.50% of assets per year, some are as high as 1.5% per year. Typical sensible mutual funds are 0.35% to 0.75%, with some as high as 2% or more.Overall, ETFs are somewhat cheaper than mutual funds for very large investors. A $1,000,000 investment for a year in a SPDR would have a management fee of $1,200, plus stock commissions of about $600 round-trip. That's about break-even for an $1,800 management fee at Vanguard. The $25,000 investor is clearly better off at Vangaurd, especially with the extra services, the $10,000,000 prefers the SPDR. A more frequent trader would prefer Vanguard from this analysis, but would run up against rules designed to prevent trading. A very long-term holder might prefer the SPDR at a lower investment level.The main difference is the ability to buy and sell ETFs intraday and with limit orders. If you need that, you need ETFs. If you don't, unless you're investing a very large amount of money, low-cost, well-run mutual funds probably make more sense.

QuoteOriginally posted by: AaronETF fees are similar to the low-cost quartile of mutual funds. The cheapest ETFs are S&P500 ones, because they are in a war with Vanguard S&P500. SPDRs charge 0.12% versus 0.18% at VanguardDo these number refer to the Management Fee or the higher Operating Expense ratio (sometimes called the Management Expense Ratio?Let's consider the following definition of the Operating Expense Ratio (OER):"The percentage of the Assets that are spent to Run a mutual fund (as of the last annual statement). This includes expenses such as Management and advisory fees, Overhead costs, and 12b-1 (distribution and advertising) fees. The Expense ratio does not include brokerage costs for Trading the portfolio, although these are reported as a percentage of assets to the SEC by the funds in a Statement of Additional Information (SAI). The SAI is available to shareholders On request. Neither the expense ratio nor the SAI includes the Transactions costs of spreads, normally incurred in unlisted securities and foreign stocks. These two costs can add significantly to the reported expenses of a fund. The expense ratio is often termed an Operating Expense Ratio (OER).

What Aaron said about Vanguard.Note also that Vanguard sponsors two ETFs (so far) of its own, these being ETF class shares (Vanguard calls them "VIPERS") of its Total Market Index (Wilshire 5000) fund and its Extended Market Index (Wilshire 4500, which is Wilshire 5000 less the S&P 500 companies). These get a mild break on expenses relative to general shares of the corresponding mutual funds. The Total Market Index ETF (symbol VTI) is a very, very nice security for individuals to deal with if they want to take a position relative to the market while being agnostic about which particular companies are best. Vanguard is also working on getting ETF shares for some of its international index funds, but generally the companies that own the indices want to do their own ETFs and have challenge Vanguard, which is why there is no Vanguard S&P 500 index ETF. I think that Vanguard is actually changing some of the indices it uses in order to be able to start ETF shares.Another difference between ETFs and mutual funds is that you can generally trade options on ETFs.

QuoteDo these number refer to the Management Fee or the higher Operating Expense ratio (sometimes called the Management Expense Ratio?I think both numbers are all-in fees, excluding only commissions (ETFs) and loads and account fees (mutual funds). However, at one point I read a mind-numbingly complex comparison of actual fees between SDPRs and Vanguard Index 500 that claimed Vanguard was actually a bit cheaper assuming average share appreciation due to the exact way things are computed.Generally an ETF will have less trading even than an index fund, so commissions and bid/ask spreads paid by the fund will probably be lower for an ETF.All other things being equal, I prefer an option on a physically-deliverable underlying to an option on an index. But there is little to choose between the two. Option liquidity is more important than precise underlying.

ETFs generally allow you smaller positions, and, if you're writing, ETFs allow you to be covered. I would guess that liquidity is almost always better for index options than for ETF options. And, depending upon what you are doing, you may really want to end up in or out of your underlying when the option expires -- minor matter.

Is it fair to say that we are building towards a consensus that ETFs are clearly better than mutual funds? So far, we have:- lower all-in costs to the investor- greater liquidity and pricing transparency- more flexible options for execution, risk management, and derivative strategiesHave I missed anything?