U.S. investors have reportedly saved a substantial amount by choosing exchange-traded funds (ETFs) over mutual funds, with savings reaching approximately $250 billion since 1993.
What Happened: U.S. investors have saved approximately $250 billion by opting for exchange-traded funds (ETFs) instead of traditional mutual funds since 1993. The savings represent 2.5% of the $10 trillion U.S.-listed ETF market, Financial Times reported on Tuesday.
The primary reason for these savings is the tax advantages ETFs enjoy under the U.S. tax system, along with their lower fees. The average total expense ratio for ETFs in the U.S. is 0.16% of assets, compared to 0.44% for mutual funds, according to Bank of America.
ETFs incur a "tax drag" of 0.36% annually, significantly lower than the 1.28% experienced by mutual fund investors. This is due to mutual funds' capital gains tax liabilities, which arise from necessary "cash" transactions when investors sell units.
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ETFs, however, can deliver stock baskets "in-kind" to authorized participants, avoiding pass-through capital gains to investors. The tax efficiency of ETFs means investors pay more capital gains tax when selling holdings, but these are often long-term gains, taxed more favorably.
Jared Woodard, investment strategist at BofA Securities, noted that ETF investors have saved $250 billion since 1993, despite 57% of mutual funds being in tax-sheltered accounts. The trend of investors favoring ETFs is expected to continue.
Why It Matters: The growing preference for ETFs is not only a reflection of their cost-effectiveness but also indicates a shift in investment strategies amid evolving financial landscapes. The recent election of Donald Trump has sparked discussions about potential regulatory changes that could further impact the ETF market. Industry experts anticipate that a pro-crypto Trump administration might pave the way for broader approval of innovative crypto-based financial products, including crypto ETFs.
Additionally, the launch of new ETFs, such as the Atlas America Fund by economist Nouriel Roubini, highlights the strategic use of ETFs to address economic uncertainties. This fund aims to mitigate risks associated with the Trump administration’s economic policies, underscoring the adaptability and resilience of ETFs in diverse market conditions.
Price Action: As per Benzinga Pro, he two key ETFs that track S&P 500 and Nasdaq 100, namely SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust, Series 1 QQQ, have risen 90.56% and 152.13% respectively in last 5 years. Meanwhile, the YTD returns for SPY has increased by 27.93% and that of QQQ has risen by 29.75%.
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Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.
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