The recent announcement that brokerage firm Charles Schwab will launch an all exchange traded fund (ETF) 401(k) plan in 2012 is further indication of just how far ETFs have come since their introduction in 1993.
An ETF price war is also doing much to raise ETFs’ profile and attract investment dollars. Vanguard, which earlier this year overtook Blackrock to become the third-largest U.S. ETF fund, recently announced it was cutting costs on many of its fund offerings. Vanguard’s growing presence in the ETF market was further enhanced when ING DIRECT’s Share Builder 401(k), an all ETF 401(k) plan provider, added four low-cost Vanguard ETFs to its lineup.
Ascensus, a retirement plan solutions provider, recently announced its partnership with 3D Asset Management to offer a new exchange-traded fund (ETF) package aimed at the 401(k) market. In February, iShares struck a deal with Fidelity to add five more ETFs to Fidelity's free trading program.
With $1 trillion in assets, ETFs offer the diversification of an index fund and the flexibility of a stock. As with stocks, they can be traded throughout the day as opposed to mutual funds, which can only be traded at the close of business day. Because they are not actively managed, they have lower costs than other investment products.
It is in part the latter feature that has kept them from making inroads in the estimated 401(k) market, which has an estimated $3 trillion in assets. In addition to record-keeping and plan management issues, conventional wisdom held that 401(k) plans are built upon ingrained systems that accommodate mutual funds, and that it would be hard to change attitudes of more conservative plan administrators.
That is changing. Hewlitt-Packard, Samsung, and United Airlines are among larger companies using ETFs in their 401(k)s.
But are ETFs a good fit for your 401(k)? Intraday trading is at odds with buying and holding strategies most common for retirement funds. For the less aggressive investor, mutual funds offered in your 401(k) should be a good fit.