Investors planning for retirement may finally have an opportunity to keep more of their portfolio profits. As the cost to carry investments over long periods of time evaporates, the investing class will enjoy a higher standard of living, and banks will build a better relationship with their clients.
Not Free, But Nearly
In just a few short years, the biggest development on Wall Street has grown from just one fund. Exchange-traded funds are hot; in fact, nearly 33% of all stocks traded each day are an ETF, and companies are catching on the bandwagon, offering new investment plans centered on an ETF model.
Exchange-traded retirement plans are the next frontier; never have investors been so enabled to balance their future however they decide. And with all of this transparency and good accounting, investors also get annual fees a tenth of what they're used to paying. Scrap load fees too, as exchange-traded funds cost only the brokerage fee to make the trade – which is significantly better than the standard 4-5% pure commission load.
Meet the New Boss
The new boss in retirement planning is not financial planners or traditional brokerage firms. Instead, the new boss is the deep discounting direct broker that allows investors to buy and sell ETFs just like stocks. The financial sector is quickly divvying up exchange-traded fund demand between themselves as they try to offer as many portfolios as possible to attract investors into the inexpensive funds.
So Many Funds, So Many Opportunities
At present, there are approximately 800 exchange-traded funds operating on Wall Street. Though many of the funds overlap by offering a similar portfolio of stocks or operate in one sector or commodity, there is plenty of consumer choice in which exchange-traded product to purchase. The average investor has multiples more funds than ever needed to fully encompass the market, and many investors are slicing up the pie between low-cost index funds and a few personal favorite sectors. Such buying is prompting ETF issuers to create actively managed and target date funds to court mutual fund investors into something new.
401Ks Are Next
Exchange traded products have been the most popular in IRAs and other retirement accounts, where the investor generally makes one bulk investment each year. However, as more competition enters the exchange-traded product industry, investors can expect that brokerage fees will ultimately fall to make ETFs the best option for any investor, regardless of total capital.
At present, only the wealthiest of investors see a huge benefit on their initial investment, while less wealthy investors do not see immediate returns and may take as long as 5-10 years to recoup their initial investment costs. Programs like ShareBuilder and other low cost brokers shall feed the ETF scene as investors have to pay a brokerage fee with each subsequent investment they make.
Will ETFs Supplant Mutual Funds?
It remains to be seen whether exchange-traded funds have enough staying power to become the ultimate investment product for the next generation. ETFs assets are still dwarfed by mutual funds, as many in the investing public haven't even heard of exchange-traded funds. However, the tide could soon change as the populist movement towards saving money grasps a greater part of the investing class. With such low fees and great liquidity, it should come to no surprise that ETFs will emerge as a mutual fund contender.