Motley Fool folly

Thank you, dear Tan Choong Hwee, for these clarifications.

It seems to be a trend for fund houses to convert from mutual funds to ETFs. It is a step taken to jump on the ETF-lower-cost-than-mutual-fund bandwagon mainly to attract investors putting their money.

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Lets do a thought experiment. Lets say a fund house decides to convert a mutual fund to ETF, with exactly the same fund manager, the same analyst team, the same admin support, the same investment thesis, the same selection criteria, and so on. Everything the same except for the form it takes, how does the fund house magically reduces its expense ratio with the same cost structure? Isn't it that they cut their profits in order to reduce expense ratio? Can't they do the same for mutual fund?

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From investors' perspective, if expense ratio can be made the same, the additional cost would be the cost of purchasing mutual fund vs ETF. This may be on equal footing as there are zero fees mutual fund trading platform as well as commission free ETF brokerage, but the latter will always have exchange/regulatory fees.

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One more difference is mutual fund is single priced at NAV, but ETF price is subject to supply and demand forces, and can be above or below its NAV. The latter will cause deviation in performance.

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To me, mutual fund and ETF are just different forms of fund structure. The expense ratio is entirely up to the fund house to set/structure. This current trend of converting mutual funds to ETFs is due to the entrenched lower cost perception the financial world had given to ETF.