Mutual Funds vs. ETFs

July 30, 2019

Mutual Funds vs. ETFs with Bud Kasper & Jason Newcomer

Financial Scams Targeting Seniors

Mutual Funds vs. ETFs Show Notes

Many investors have had questions lately about the difference between mutual funds and ETFs: why choose one over the other? Are they the same? What differentiates these two products, why are there so many offerings that appear to be so similar, and which is the best choice for my portfolio, especially as I approach retirement?

To help answer this question, I’m joined today by Bud Kasper and Jason Newcomer. Bud is one of the first CERTIFIED FINANCIAL PLANNER® in Kansas City, and in his over 40 years in the industry, he has seen firsthand how this business has changed. Jason, on the other hand, is one of our youngest CERTIFIED FINANCIAL PLANNERS®. He joined Barber Financial Planning in 2007 while studying finance, and has been practicing full time since 2010.

Today, the three of us dive deep into the benefits, flaws, and risks of both mutual funds and ETFs – and what you should look at before adding either product to your portfolio.

In this podcast interview, you’ll learn:

  • What an Exchange Traded Fund (ETF) is and what it does, why Jason likes them, and the unique liquidity factor that ETFs have over mutual funds.
  • How index funds invest in and represent the companies that they “track” – and the difference between equally weighted and cap weighted ETFs.
  • The difference between active and passive management, how this pertains to mutual funds and ETFs, and why mutual funds rarely ever beat the index.
  • How you can use a combination of both mutual funds and ETFs to diversify your portfolio and reduce risk.
  • The reason instantaneous news and access to troves of data has hurt more individual investors than helped them – and why this leads to making mistakes.

Inspiring Quote

    • “It’s all a matter of design. What you are investing for, and what you’re trying to accomplish with that strategy?”
      Bud Kasper
    • “Investors need to understand not only what their money needs to do, but what it is that they’re buying, and how will that, over time, fulfill that goal.”
      Dean Barber

Interview Resources

Interview Transcript

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[00:00:09] Dean: As always, thanks for joining me on the Guided Retirement Show. I’m Dean Barber, Managing Director at Modern Wealth Management. I know there are thousands of podcasts out there and I appreciate you choosing to listen to the Guided Retirement Show. In this episode, I am joined by Bud Kasper, CFP®, in the business of financial planning since 1982 and Jason Newcomer, also a CFP®, in the business since 2010. We’re going to discuss in detail the difference between mutual funds and ETFs or exchange-traded funds in this episode. There’s a lot of details and there are a lot of questions on investors’ minds about what is a mutual fund, what is an ETF. We’re going to dive deep into what the difference between the ETF and the mutual fund is. We’re going to talk about some basic similarities and differences, and why a person might want to choose one over another. Enjoy.


[00:01:04] Dean: So, joining me today on the Guided Retirement Show, Bud Casper and Jason Newcomer. Gentlemen, good to have you here.

[00:01:11] Jason: Thank you, Dean.

[00:01:12] Bud: Good to be here.

[00:01:13] Dean: All right. So, by way of introduction, let me start with the age before beauty. Bud, you’ve been in the financial planning business or let’s call it the investment business since 1982. So, as we put this episode the podcast together, you’re approaching 40 years in the industry here, so you’ve seen a lot of changes and seen a lot of things happen. You were one of the first CERTIFIED FINANCIAL PLANNERS® in Kansas City, you sat as a Chairman of the CERTIFIED FINANCIAL PLANNER® Board.

[00:01:54] Bud: Chairman of the Institute of CERTIFIED FINANCIAL PLANNER® for the Heart of America and Chairman of the Financial Planning Association of Greater Kansas City. So, yeah, I got a lot of years into this, Dean.

[00:02:04] Dean: Yeah, you do.

[00:02:05] Bud: And you know what, as the times gone by, it’s only gotten better.

[00:02:08] Dean: Good. And also, now Jason Newcomer and the last name is – I’m not calling you a newcomer. That’s actually his last name. Compared to Bud, we might say you’re a newcomer to the industry. You joined Modern Wealth Management in 2007 while you were going to college to study finance and begin your full-time career in 2010. We’re one of the youngest people to get their CERTIFIED FINANCIAL PLANNER® credentials, and so it’s going to be a great honor to have both of you on here today. And so, as we talk about investing and that’s kind of our theme is investing and we’re going to take this in whatever direction it goes. But let’s set the stage here for why we want to talk about investing as it pertains to retirement. And the whole premise behind the Guided Retirement Show is to help people make sure that they got a good guide to help them make the right decisions as they go through retirement. Now, both of you guys know that when it comes to making an investment decision, investment decisions near retirement and in retirement are totally different than investment decisions that get made in your younger years and you both as CERTIFIED FINANCIAL PLANNERS® both also know that people shouldn’t be making investment decisions without having completed a financial plan because they have no idea what they want their money to do or what the money actually needs to do.

[00:03:49] Bud: That’s absolutely right.

[00:03:51] Dean: So, I want to open up a conversation about mutual funds and ETFs. We may get into a little bit of discussion about some individual stocks or individual bonds, but I want to dive in deep for our listeners so that they can really more fully understand what they own if they own a mutual fund or what they own if they own an ETF. And for this episode, let’s try to stick to the ETFs and the mutual funds. Jason, I’ll start with you. Let’s go with this newest latest kind of craze of what’s going on in the investment world, the ETF, the exchange-traded fund. Explain in really simple terms what is an exchange-traded fund and why you like the exchange-traded funds.

[00:04:40] Jason: Sure. Yeah. So, ETFs have been around for about 25 years. The first one that came out was put out by a company called State Street and they put out an ETF that was just designed to track the performance of the S&P 500 and the ticker SPY is still out there, still available, one of the most popular ETFs that’s in existence today. And essentially, an ETF is just an investment vehicle similar to a mutual fund that holds a basket of underlying securities. So, the S&P 500 ETF, for example, just owns 500 US companies that trade inside of that index, so it gives investors a very easy way to replicate the performance of benchmarks that they’re very used to seeing in the headlines.

[00:05:31] Bud: Now, let me add to that, though, that what that ETF is doing is indexing, okay, if the term needs to be understood. It’s just following what the S&P or Standard & Poor’s created a portfolio with 500 approximate stocks in that. The beauty of that index is that it covers all 11 sectors that you can invest in from that perspective but that’s always coming down the cost and that’s where we’ve seen a huge change over the years associated with it. So, the ETFs are probably the least expensive way of capturing if you will the results of what that index represents. It’s not a huge difference. You could go into the Vanguard 500 mutual fund. I think the cost is around 0.20 or something like 0.24. We view the same thing in the ETF. It’s what? 0.10.

[00:06:21] Jason: Probably close to 0.1, yeah.

[00:06:22] Bud: Yeah. So, right around that little slight difference. Now, why would you do one versus the other? And it comes back to the definition, Dean, and that is if you have a mutual fund and if you were to buy it that day, let’s say 10 o’clock in the morning, you don’t know what you paid for until the end of the day when they value all the securities divided by the number of shares outstanding to get the price per share. In ETF’s advantage is that it trades second by second, no different than stock does, and therefore you have a liquidity factor that mutual funds don’t represent since they trade only at the end of the day in terms what the results are. And I think there is some advantage to that particularly if you are an investor that wants to be active with it. I think the vast majority of clients that I represent aren’t in that trading mode so therefore we have a little bit different outlook.

[00:07:12] Dean: All right. So, let’s go back to that ETF then, Jason. So, the S&P 500 index or the SPY run up by State Street was designed to track the S&P 500 index which everybody says you can’t invest directly in the index and which is a true statement. That’s why these index ETFs were produced is to allow a person to have that same type of performance.

[00:07:37] Jason: Right. Yeah.

[00:07:38] Dean: Now, would it be fair to say that not all ETFs are created equal.

[00:07:44] Jason: Absolutely. Yeah. There are several ETFs that will track similar benchmarks or similar indices, but they’ll have slightly different methodologies to doing that or slightly different internal expenses so you really have to just because you’re wanting to track or replicate the performance of the S&P 500 not all of those funds are going to give you the exact same result.

[00:08:09] Dean: So, when you say the S&P 500, let’s just make sure that our listeners can really get a grasp of what we’re talking about, the 500 largest publicly-traded companies in the US on domestic market covering like Bud said all 11 sectors but it’s not an equal weighting of all 500 companies. You’re not just taking 1/500th of the amount of money invested and it goes equally into all 500 companies. How is the amount that it is invested or into each individual company? How’s that determined? And are all of the funds that call themselves an S&P 500 index fund are they all doing it the same way?

[00:08:50] Jason: No, they’re not. So, the S&P 500 is a, as Bud you said, a cap-weighted index so it’s market-cap-weighted so that basically means the larger the company, the larger of a percentage of that index or of that ETF that they will represent. So, for example, you might have a company, the top company in the S&P 500 right now. You might see a 5% share that could be Amazon or Apple or Microsoft.

[00:09:19] Bud: An alphabet.

[00:09:20] Jason: Yeah. Well, those companies might represent 5% of the S&P 500. Well, that’s a lot more than maybe the bottom company.

[00:09:29] Bud: Yeah. And from the pure definition of what an index is supposed to do, you would think they’d be equally weighted and there are ETFs of the 500 that are equally weighted so if you don’t want to have that cap-weighting. Here’s the issue with that. If all the sudden the overweighting and the caps is in technology and the technology fails, it’s going to impact that index more than an equally-weighted index would be.

[00:09:53] Dean: So, you can buy an ETF that’s equally weighted amongst all 500.

[00:09:59] Jason: That’s right.

[00:10:00] Dean: And why would one choose one versus the other?

[00:10:06] Jason: You know, really if you’re not wanting overexposure to those largest 10 companies in America, as Bud said, those 10 companies aren’t necessarily the best indicator of how is the United States economy performing or how is the market performing.

[00:10:22] Dean: So, are there periods in time when the equal-weight ETF will do better than the cap-weighted ETF?

[00:10:29] Bud: Sure. And that will be when the cap-weighted parts of the index are failing, the equally-weighted won’t get hit as hard. So, it’s all a matter of design and it’s all a matter of what you were investing for and what are you trying to accomplish with that strategy.

[00:10:46] Dean: Okay. So, let’s continue on this ETF discussion here because I think it’s interesting. There are not only ETFs that track indices, but there are ETFs that track sectors. So, talk a little bit about that, Jason.

[00:11:01] Jason: Yeah, absolutely. There’s just about any sector. I had a client come to me and asked me probably a few months ago, “Hey, I want to invest in this specific healthcare stock company,” and I thought, “Well, that’s a very concentrated position. I understand why you would like the healthcare sector with the aging population. That’s a booming part of our economy.” Rather than pick one company out of that sector, why don’t we invest in the entire healthcare sector and ETFs provide a great way of allocating money to those broader sectors?

[00:11:39] Dean: Here’s my question. If it’s that simple, why do we need dozens and dozens and dozens of different companies creating their own version of a sector ETF or of an index ETF? So, you take a look and say, well, how many different ETFs are there today and there’s thousands of them. And so, how does the individual investor decipher what’s the difference between an ETF say put out by State Street versus Vanguard or T. Rowe or whoever else might be doing these ETFs. And what’s the difference? Why are there so many? Why don’t we simplify this?

[00:12:17] Bud: Because it’s a business and they’re trying to capture assets and make money off of it, no different than any other.

[00:12:25] Dean: Right. But what separates one from another?

[00:12:28] Bud: Very little in a lot of cases associated with that. So, it depends again on the risk level and the purpose of what you’re trying to invest with.

[00:12:37] Dean: Right, but bottom-line ETFs, I’m trying to get our listeners to get a picture of why do I have to choose? If I want an S&P 500 index ETF, why do I have to choose between 20 different companies or I don’t know what the number is, but there’s a bunch of them that actually create that same type of model or the healthcare sector, Jason, you just talked about. Why are there so many people trying to replicate the healthcare sector? If it’s just an ETF and then they’re just trying to model it or track this one sector, why do I need 20 different or 30 different 50 different companies trying to do that? And can one track that sector or that index better than another?

[00:13:16] Jason: I think what these companies will do oftentimes is create their own indices and that comes down to their methodology. They might say company A’s index that they’re tracking to replicate the performance of the US large-cap market. We think we can do it better with an index that will create so we’re going to create our own and it might have a little bit different methodology where they’re saying, “Well, we’re going to do equal-weighting, for example, as opposed to market cap weighting.” So, there may be slight differences between companies trying to stand out. As Bud said, everybody wants a piece of the pie and they’re going to try and get theirs.

[00:13:54] Dean: So, they’re trying to create a competitive advantage. Can they really show it? Is it proven?

[00:13:59] Bud: You can track it. No different. You can track any investment. You want to certainly look at it through different periods of time both in booms and busts both to see how they stand up and that might be one of the deciding factors as to which one you’re going to use.

[00:14:12] Dean: Now, I know one of the downfalls or the things that people need to be aware of if they’re going to be investing in an ETF is that unlike a mutual fund where the mutual fund is a guaranteed buyer of the shares so you have guaranteed liquidity, although it may be at the end of the day, if you have shares of an exchange-traded fund in order for you to sell those shares there’s got to be somebody else on the other side of the table that’s willing to buy those shares. So, if we had a collapsing market as an example and you owned an ETF and you want to sell it and there’s nobody on the buy side, there’s no guarantee that you can unload that thing.

[00:14:52] Bud: I agree. That is one of the flaws of ETFs but let’s talk about in reality that’s on the extreme. You know that’s not something…

[00:15:00] Dean: Well, but there’s things that happen on the extreme all the time that we don’t expect and it’s the unknown. It’s the things that we don’t know that can happen that cause people panic or people problems. And the reason I bring up all of the different ETFs in the beginning here and then the fact that you may not be able to sell it is because I think one of the things that a person needs to look at before they purchase an ETF or any good planner or investment advisor should look at before they put an ETF in a portfolio is what’s the trading volume on that particular ETF because you might have some ETF that some companies come out and they go, “We created our own little nuance to this ETF. It’s going to be better,” but it’s really thinly traded, so there’s not a lot of action in that and then something happens and they want to sell.

[00:15:48] Bud: Well, remember, it is per individual stock inside that ETF so you’re right. If you’re going in and you have a run on the market which the underlying securities are dropping simultaneously, that ETF’s going to fall as well. And, yes, you could have a liquidity issue.

[00:16:04] Jason: Yeah. Like you said, you know, looking at trading volume when considering whether or not to add an ETF to your portfolio is critical and there was a time probably a year-and-a-half ago, when our custodian released 300 different ETFs that we could look at the Trade and Commission free and we thought, “Gosh, there’s 300 great ETFs here.” Some of them we really liked, but we have to look at the trading volumes and say, “Gosh, maybe there’s only several thousand shares being traded in a day. We can’t take the risk that we don’t see it sell.”

[00:16:37] Dean: Now, that’s different for a big company like ours where we’re making trades in model form where we may be trading $40 million, $50 million, $100 million in an individual ETF in the course of a day because we decide that we want to reallocate that particular sector or whatever falls out of favor. And so, I think it’s more critical for the investment advisor to get that if they’re running big portfolios like we are versus if the individual investor they’re putting in $100,000 and they got 10 different ETFs, well, I got $10,000. They’re probably not going to have to worry about those liquidity problems, but they should understand that that exist before they buy that ETF.

[00:17:22] Bud: And let me add too that, Dean, because I’ll give you a perfect example. I had a client this week who has a well-known stock and he had over $1 million. So, when we put in that order to sell those stocks, did we fill that in 1 point?

[00:17:38] Dean: Probably not.

[00:17:39] Bud: No, we didn’t so we ended up selling it at this price level, this price level, this price level to get the average that we are going to get to the point. That’s part of that volatility that is inherent to stocks that is inherent to an ETF.

[00:17:52] Dean: So, you could get into a scenario where you’re trying to unload your ETF on a given day and there may not be enough people out there wanting to buy. They might buy a portion of it at one price and they might get another portion of it sold at another price.

[00:18:03] Bud: That’s right. So, if you saw that price at that particular time, you put the trade and that isn’t necessarily the price you’re going to get.

[00:18:10] Dean: So, one of the things that came out of the Investment Company Act of 1940, which is what formed what are commonly known now as mutual funds, one of the appeals coming out of the liquidity crisis of the Great Depression where people couldn’t unload and they couldn’t sell one of the appeals to the mutual fund was that you had a guaranteed buyer in that fund. In other words, if you want to redeem your shares, the fund guarantees that they’ll buy back those shares at the close of business on any given day of whatever the settlement price is. So, that’s different than the ETF and I think when ETFs were originally introduced and they were very thinly traded, there a lot of people that were worried about that liquidity. Jason, is that liquidity were you at all today? I know you said you look at just recently out of 300 different ETFs that all of them there were some pretty good ones on there but some of them were too thinly traded for you to say, “Yeah, let’s add those to a portfolio.”

[00:19:04] Jason: Yeah. That’s basically a non-starter for us is when we’re managing portfolios like we are to the size that we are, you can have the greatest ETF in the world that cost you a fraction of a percent, but if there’s not enough shares exchanging hands, we can’t take the risk of adding those to our portfolio.

[00:19:23] Bud: Yeah. I think he gave a good example in the healthcare that the gentleman wanting a healthcare stock. Why not have an ETF and diversify among the other healthcare packages are there? The one that has been getting the most calls recently is cannabis. Everybody is like, “Well, I’ve heard about this stock and they’re doing medical marijuana and all this. I’ve got this company. I’m not sure about this. I don’t know very much about the industry. How is it going to work?” But an ETF gave them some protection through diversification, so that might be an answer for certain people.

[00:19:55] Dean: Okay. So, let’s talk about a little bit more of a difference between the ETF and the mutual fund because I don’t think the average investor really understands the difference between an ETF and a mutual fund and I always think it’s important for people not only to first understand what their money needs to do but then what is it that they’re buying and how will that over time, hopefully, fulfill that long-term goal? And so, in the aspect of internal management, what’s the difference between the ETF and the mutual fund? Bud, I’ll let you take that.

[00:20:35] Bud: You gave the answer. While ETFs are passive, there are a slim few percentages that might be active, but it defeats the purpose. They’re buying and selling whenever they desire to do so.

[00:20:50] Dean: Define passive.

[00:20:51] Bud: Passive means you’re not doing any changes to it. It’s fixed. It’s locked in.

[00:20:55] Dean: So, it is what it is. There’s nobody in there saying we think this stock might do better than that stock and should we all wait here or there? It’s purely if you’re going to buy the healthcare sector, you’re going to get the healthcare sector, right? And whatever the average of the healthcare sector is, that’s what you’re going to get. If you’re going to buy the SPY like Jason talking about, you can just mirror whatever the S&P 500 index is doing. So, there’s nobody in there saying I think I can pick better stocks or I think that these sectors out of the S&P 500 are doing better so let’s overweigh the portfolio there.

[00:21:27] Bud: Well, you do have that. You have that in the mutual fund.

[00:21:30] Dean: I understand but not an ETF.

[00:21:31] Bud: Not an ETF because it’s costly and the whole reason for ETFs is to drive the cost down from a manager to the lowest level possible to get the highest return.

[00:21:42] Dean: All right. So, let’s get into this argument then of active versus passive because active management is the hallmark of the mutual fund. You have these active money managers who are arguably highly intelligent people, men, and women that have made a career out of saying, “I can do a better analysis of which companies out there provide the best buying opportunity.” They’re not just going to go in and say, “Well, I’m going to pay for everything and I’m going to own everything,” because they think that through their research, through their due diligence that they can pick companies that will outperform if you just bought a little bit of everything.

[00:22:34] Bud: Remember, the concept of the mutual fund which it was back in 1924 with the Massachusetts Trust Company was to actually provide the smaller investor the opportunity to be in a larger portfolio of diversified stocks, active management, and that’s where it is. But if you look at the statistics today, only 92% of all mutual fund active management beats the index. So, while you are giving a correct history on the evolution of mutual funds from the beginning, the reality is, and I’ll get some credit to John Bogle of the Vanguard Funds, they came in and said, “Yeah, we have these,” because they had actively managed portfolios, but they said the index is the market so instead of trying to beat the market, just be the market and in the example we used available both on the mutual fund platform or an ETF platform.

[00:23:27] Dean: But there’s periods when that active management is going to do far better than just the market itself and then there’s periods where the market itself might do better than the active management. So, Jason, you want to talk a little bit about what causes those periods or your theory behind that?

[00:23:41] Jason: Yeah. And as Bud alluded to that statistic that only 8% of active managers outperform their benchmark, you see that…

[00:23:51] Dean: But the question is how many active managers are there.

[00:23:54] Bud: I don’t know the exact number, but a large number.

[00:23:57] Jason: Thousands.

[00:23:58] Dean: Thousands? Okay.

[00:23:59] Jason: Well, maybe not, but yeah, there are thousands of mutual funds out there that do active management but…

[00:24:04] Dean: So, if 8% of those that’s still several hundred that a person could pick from that it can outperform the index so why would I not look for those?

[00:24:10] Bud: Well, the question is do you have the skill sets to find those managers and if you don’t then you’re probably better off indexing.

[00:24:17] Dean: But there’s a saying in our industry, past performance doesn’t guarantee future results. So, just because that manager might’ve gotten lucky and did something exceptional over a period of time, and it skews the numbers over a period of time, does that necessarily mean that that active manager can do it again? Maybe they loaded up on Apple when Apple was brand-new or really cheap or Amazon or Alphabet and they got a big hit. Well, now guess what? That piece of the portfolio got bloated because there’s limitations on how much any one individual stock can make up in a portfolio. Maybe they set that thing that mutual fund and what’s called an incubator phase for a few years and really juice those returns up so that it makes people think, “Well, gosh, look at the average returns on this.”

And I always got to go back and say, “We got to quit looking at average returns,” because nobody can spend average returns, right? We can spend real money and I think one of the fallacies is when we say, “Well, here’s what the average of the markets done over the X period of years,” or, “Here’s what the average of this mutual fund’s done over X period of years.” That’s great, but let’s look at it year-by-year and I personally believe that consistency is something that is to be desired, especially for people that are nearing retirement or in retirement.

[00:25:34] Bud: Yeah. I think we need to be fair with the history associated with this because the mutual fund industry might’ve started in 1924. It really didn’t take hold until the 1970s, and they really took hold in the 1980s. So, I think you started the business in 1987 if I remember right.

[00:25:49] Dean: I did.

[00:25:50] Bud: And that faithful year.

[00:25:52] Dean: Black Monday, October 19, 1987. Don’t blame me though. It wasn’t my fault.

[00:25:56] Bud: But the reality is, is that they were becoming a profit tool for the brokerage houses and so what I mean by that is you can go and buy a mutual fund and back then I can remember when there was 7.5% commission.

[00:26:11] Dean: 8.5% when I started is what the maximum allowable was and so there were funds out there that we’re charging that 8.5%.

[00:26:16] Bud: So, if that was coming off the top of your investment, what do you have to do? Well, you got to make up the cost of the commission before you start making money for yourself, but then you got to look at the internal cost associated with that. Now, I believe in combination of ETFs and mutual funds in a portfolio. I think I’ve driven that point so well in fact that our clients have come to realize that there’s attributes of both. They can really when combined properly in an allocated manner can really drive the portfolio into lower risk and solid returns and I believe that wholeheartedly but you’ve got to have the ability of being able to make the selection of those active funds and if you’re good at it or if you have a good resource to be able to help you with that, then you have a chance of maybe beating the index.

[00:27:08] Dean: But just so just beating the index for beating the index’s sake. So, okay, maybe I think that our industry has done just a horrible disservice by trying to convince people that what they should do is benchmark against the market itself as if that is the index that they should be measuring against, right? So, if that were true, and you held an active mutual fund from fall of 2007 through March of 2009 that only lost 50%, you’d be saying we just hit a home run because we outperformed the S&P 500 index by 7% because it lost 57% or for 55%. So, is that really was that success because we only lost 50% instead of 55? Really?

[00:28:06] Jason: Yeah. I mean, there are periods in time like you said where these actively managed funds will go through kind of goes in cycles. Active management is en vogue and then passive indexing is en vogue and presently I think that we all agree right now there’s a huge interest in the passive indexing movement right now.

[00:28:26] Bud: And that worries me a little bit in and of itself because it tells me if that’s the case, every mother or son who’s directing money is going into that particular space and therefore average might be very average.

[00:28:38] Jason: Right. Yeah. But there are maybe certain markets where active management is more valuable than passive management. So, we talked about 8% of US active managers outperform the benchmark but if you look at less efficient market like overseas small-size companies, we’re saying 24%, 25% of active managers outperforming those benchmarks. So, I think to your point, Bud, about kind of building portfolios that include indexes, ETFs, as well as actively managed mutual funds, there are certainly places in portfolios for both strategies.

[00:29:19] Bud: And one thing that we’re seeing now is when you look at the total amount of money in mutual funds, it’s $6.7 trillion. When you look at the amount in ETFs, it’s $1.7 trillion. But the reason for the big number and the mutual funds at this point is because they’ve been embedded in 401(k) plans and that’s why there’s so much money and it’s gravitating that way. Now, as we’re starting to get the introduction of some ETFs into 401(k)s, you’ll see that ETF number increase. I can guarantee you.

[00:29:48] Dean: Okay. Let’s take a quick break. This is the Guided Retirement Show. I’m Dean Barber. We’ll be right back.


[00:29:55] Female: Thank you for joining us on the Guided Retirement Show with Dean Barber. We hope you are enjoying our show. If you’d like more information on what Dean is discussing on this episode, make sure to visit us at Make sure to subscribe so you can stay up to date with our latest episodes. Know of someone who could benefit from learning more about their retirement? Go ahead, share us with a friend. That’s the

[00:30:26] Dean: If you have shares of an exchange-traded fund in order for you to sell those shares, there’s got to be somebody else on the other side of the table that’s willing to buy those shares. So, if we had a collapsing market as an example, and you own an ETF and you want to sell it and there’s nobody on the buy side, there’s no guarantee that you can unload that thing.

[00:30:44] Bud: I agree. That is one of the flaws of ETFs.


[00:30:56] Dean: We’re back. All right. So, if I’m a listener right now, what’s my conclusion to ETF versus mutual fund? I mean, you guys got a lot of statistics here but how in the heck from the thousands of different mutual funds and ETFs is the individual investor, especially that person that’s approaching retirement or in retirement, how are they to make sense of everything that’s out there? You know, but you remember this very, very clearly when the Internet was born and all of the data that you and I used to have to comb through books and really…

[00:31:35] Bud: Read report after report.

[00:31:37] Dean: Right. There was no Internet that was instant access to all this information. Well, when that era came about, there was so much talk that you will never, ever need to talk to a financial advisor or a financial planner again because all of this information is going to be at your fingertips. And today there’s more information at your fingertips within seconds than you and I can dig up in a week and the research that we had to do back in the early days, but I think that all of that information has done more damage to the individual investor because you’ve got instantaneous news. It’s in-your-face. It’s every day. You can look up everything every moment of every day, every second if you want to, and see what it’s doing and how it’s doing. But the vast majority of people don’t know what to make of it.

[00:32:32] Bud: And don’t want it.

[00:32:33] Dean: And so, they wind up making mistakes.

[00:32:36] Bud: Jason, I’ll let you answer.

[00:32:38] Jason: Yeah. It’s the reason that you see a lot of companies with 401(k) plans and you think, “Gosh, more options. Why wouldn’t that be a good thing?” But what the employers found was that when you give your employees and the 401(k) plans too many options there’s sort of a paralysis by analysis. So, we kind of swung too far in one direction. Now, we’re back in the other direction where maybe you see 10 different target-date funds and that’s what you have to choose from so a lot of employees are wanting to exit those 401(k) plans because they don’t like the target date funds.

[00:33:08] Bud: Yeah. Well, Dean, you and I both remember when the 401(k)s were first established I think that David Ray was the guy that was the creator at that time.

[00:33:16] Dean: Late 70s.

[00:33:17] Bud: Yeah. And the issue at what people didn’t realize at that time that this was going to be a replacement for their pension and the reason for that was the corporations didn’t want to be on the hook to make pension payments for the company, for the rest of their lives. So, let’s cut that out and just put a matching contribution and Mr. and Mrs. worker you go in there and you decide how you want your money invested.

[00:33:38] Dean: Right, but that was so horribly launched and done, and I still think today it’s horribly done because what you’re doing is you’re saying to somebody who doesn’t know what they’re doing that your retirement, your investing, it’s on you. It’s in your hands, and these employees have this fairytale false sense that somehow, someway, magically that wonderful employer knows me and what I really want to have happened and they’re watching over this 401(k). I mean, that’s what they offer so obviously they’re watching over it and then we go through a dot-com bubble in 2000, 2001, and 2002, and then we go through the financial crisis of ’07, ’08, ‘09 and people watched as 40% and 50% of their 401(k) plans eroded away and they’re saying, “Why didn’t somebody do something?” Well, what they didn’t understand was, “Hey, it’s on you, man.” Because even if you got an actively managed fund by mandate, that actively managed fund might say it has to remain 100% stocks in all market conditions. If you’re in an ETF just tracking index, I guarantee you it’s going to be in the market through all market conditions. There’s no escape to safety.

And so, I want to leave our discussion here with the difference between the mutual funds and ETFs. And as we go, well, I want to do another series with you guys here and do another episode and in the next episode what I really like to do is I’d like to discuss the proper construction of a portfolio. So, now people maybe have a better understanding of the difference tween ETF and the mutual fund but I want to dig in the details of how does a person decide how much they should have and what type of an ETF or what type of a mutual fund or what kind of a mix should they have. And we can get to that discussion on our next episode and obviously, I think this was pretty enlightening. There’s probably still a few things that we missed on the mutual funds or the ETFs.

[00:35:43] Bud: Well, I think we can continue this for another…

[00:35:45] Jason: Yeah.

[00:35:48] Dean: Is there anything else you guys want to say about ETF versus mutual funds?

[00:35:53] Bud: I don’t think it has to be exclusive one or the other. So, I have found that a blended approach is the best approach for my clients, and we’ve been able to vet through all the data to. And again, we’ll do this in the next season issue or episode. It’s just that let’s get an understanding as to what we’re truly trying to accomplish with it. You know, because there’s going to be downside risk with the market, therefore, when the portfolio is being built you have to take that into consideration. I have found it. Some famous guy told me that expense only becomes a factor in loss of value, and I believe that. So, if that’s the case, I know that there are some managers out there that go to work every day with only one outcome what they’re attempting for, get the best return at the lowest level of risk.

[00:36:40] Dean: Well, I think the second part of that is the caveat, the level of risk.

[00:36:44] Bud: Correct.

[00:36:45] Dean: Right? Because not all ETFs or all mutual funds have the same level of risk.

[00:36:50] Bud: Correct.

[00:36:51] Dean: Jason, anything else you want to add?

[00:36:53] Jason: No. I think that to echo what Bud just said, there’s no right or wrong answer. The right answer I think is what’s the portfolio that you’re going to be able to stick within bad times when stuff gets pretty hairy. Are you going to be able to maintain in that actively managed portfolio or that passively managed portfolio? And a lot of times it’s a blend that makes the most sense.


[00:37:15] Dean: All right. Guys, thanks for being here. We’ll get you back in soon. Do another episode. Stick around and make sure that you watch out for that next episode. If it’s already out there, go ahead and listen to it. Thanks for joining us.

[00:37:24] Bud: Thank you.

[00:37:24] Jason: Thanks.

[00:37:26] Dean: I’m Dean Barber, Managing Director at Modern Wealth Management. I appreciate you joining us for this episode of the Guided Retirement Show. You can find links to this episode’s show notes and giveaways all in the show description. You can also visit us at That’s Don’t forget it, hit subscribe to this podcast. Share it with your friends. Everybody needs a guide in the complexities that surround your retirement and that’s why we’re here on the Guided Retirement Show.


Investment advisory service is offered through Modern Wealth Management, an SEC-registered investment advisor.

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Investment advisory services offered through Modern Wealth Management, Inc., an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.