To hear Jonathan Steinberg tell it, investing in a mutual fund is like buying a black and white TV.

“When people saw the first color TVs, they reacted instantly: ‘Oh, Lucy has red hair? I get it!’ People love to explore technology products such as flat panel TVs, iPads and cars. But when it comes to financial products, their eyes glaze over, so they’re slower to react,” he says.

But once investors take a closer look at ETFs, Steinberg believes they will migrate in droves.



“Wal-Mart launched in 1969 and has completely transformed retail. Vanguard, the largest low-fee investment player in America, launched in 1975. It took Vanguard 15 years to accumulate $5 billion in assets. In the next decade, they took in another $450 billion. Today, they manage more than $1 trillion. It’s taken a while for people to catch on, but it would be cynical to predict anything less than transformational growth for ETFs.

“Is pricing as important in asset management as it is in retail? I would say it’s more important. If you pay more for toothpaste, your teeth get just as white. But if you pay more for asset management, your returns go down.”

Steinberg says pricing is just one of ETFs' many advantages.

“With ETFs, you have full transparency, liquidity, and tax efficiency. You also have convenience because there’s no paperwork or minimum investment, and functionality because you can trade whatever you want and use tools such as stop/loss and limit orders.”

The train has left the station
Steinberg was CEO and Editor-in-Chief at publishing company Individual Investor Group when he first discovered ETFs in 1997 and recognized them as “a better mousetrap.” He founded WisdomTree in 2006, which is now the eighth-largest ETF sponsor in the U.S. with 43 ETFs in the market and $7.3 billion in assets under management.

Traditionally, ETFs have been viewed as something akin to low-cost index funds that trade on stock exchanges. But Steinberg makes clear that an ETF is an investment structure, not an indexing strategy, and regulatory changes are now allowing ETF sponsors to explore new frontiers.

“WisdomTree offers a number of currency ETFs, including one that tracks the Chinese Yuan, even though there’s no index for it. The ETF structure is capable of accommodating almost any strategy you can imagine, including managed futures, commodities, long-short, funds-of-funds, hedge fund replication, and also a conventional portfolio manager sitting at a desk picking stocks.”

Steinberg believes that years of high fees and commissions have “corrupted” much of the advice given to investors, and the financial industry has finally reached a tipping point.

“ETF assets in the U.S. are about $800 billion compared to $11 trillion for mutual funds, $2.3 trillion for private equity and $2 trillion for hedge funds. We’re the smallest asset category, but we will grow dramatically over the next 5–10 years. In his heyday, Peter Lynch was good for the whole mutual fund industry. If some investor with enough name recognition were to launch an active ETF and bring in a lot of assets, it would put tremendous pressure on the mutual fund industry.

“Think of the Internet. It went from an interesting concept to a business, and now it’s a threat that has magazines and newspapers fighting for their lives. It will be like that, but it will take time. This isn’t brain surgery. Investors just have to take greater responsibility for their investments and demand transparency, liquidity and tax efficiency. If they do that, they will enhance their returns exponentially. There’s no question the train has left the station.”

Our view
ETFs seem poised to disrupt the manufacture and distribution of managed money products—much as mutual funds and online trading have marginalized the old school stock broker. Even if this trend is moving slowly, there could be enormous gains for those who anticipate and adapt.

Will ETFs mean the end of mutual funds? Give your answer in our latest poll at wickware.com