The Pros and Cons of Converting Mutual Funds to ETFs

If you’re thinking about adding ETFs to your portfolio, explore the pros and cons of the conversion process and how it could potentially grow your advisory business.

Are you considering converting your mutual funds to exchange-traded funds (ETFs)? If so, you're not alone. By offering low fees, tax efficiency, and flexibility, ETFs have stayed on the winning side of fund flows in recent years compared to their mutual fund counterparts.

Converting your strategy to an ETF can provide significant benefits to some clients while also making it easier to market your strategy on a wider basis. Regardless, it's important to understand the pros and cons of the ETF conversion process and if it’s right for your strategy.

Pros of converting mutual funds to ETFs

• Lower Cost
  ETFs are known for their low expense ratios and being easier to trade. This results in lower operating expenses and reduced costs.
• Market Exposure
  Since ETFs are publicly-traded securities that trade on an exchange, your strategy has exposure to a wider audience.
• Tax-Efficiency
  ETFs generally have greater tax advantages over mutual funds since low-cost basis securities can potentially be redeemed out without triggering taxes.
• Greater Control
  ETFs are traded throughout the day like stocks, providing more trading control to adjust your portfolio during varying market conditions.

Cons of converting mutual funds to ETFs

• Capital Gains Tax Implications
  Converting to an ETF doesn’t mean that taxes are eliminated – only deferred. If a fund’s shares are appreciating, you may recognize a capital gains tax. It's important to understand the potential tax implications of the conversion.
• Lack of Diversification
  ETFs aren’t the right investment vehicle for everyone. Some clients may prefer to own the securities within their portfolio directly or require customization that isn’t possible within the ETF wrapper.
• Trading Costs
  While ETFs generally have lower expense ratios than mutual funds, they may also incur trading costs when frequently bought and sold throughout the day. This can eat into your returns, especially if you're an active trader.

How an ETF conversion could benefit your business

Lower Costs can provide an opportunity to reach fee-sensitive clients for business development.	ETFs are Public in nature and can provide increased publicity that can be profile-raising for your business.	Tax Efficiencies of ETFs can be valuable for clients in higher tax brackets or with long-term investments.	Greater control creates potential to keep money invested in the market which can lead to greater capital appreciation over time.

Converting mutual funds to ETFs can be a clever move for advisors who are looking to lower fees, increase tax efficiency, and gain more flexibility. However, it's important to carefully consider the pros and cons of the ETF wrapper and understand the tax implications, liquidity, and potential trading costs.

If you’re ready to work with a partner that understands your investment goals and risk tolerance, contact ETC today to discuss if converting mutual funds to ETFs is right for your strategy.