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How ETFs Are Putting Mutual Fund Managers Out of Business

Thanks to ETFs, the largest asset management firm in the world is moving away from mutual fund managers. As an individual investor, you should too.

What is an ETF or Exchange Traded Fund?

Stacks of coins with the letters ETF isolated on white background

Photographer: Lim Yong Hian

BlackRock, Inc. is the largest asset management firm in the world, with more than $5 trillion (with a ‘t’) in assets. So when it says it’s distancing itself from actively managed funds, that’s a major story—one that caught the attention of The New York Times. What prompted BlackRock’s shift away from active fund management? The rise of ETFs, mostly.

Exchange-traded funds, or ETFs for short, have become increasingly popular in today’s market. It’s why BlackRock acquired its ETF business from Barclays in 2009 (many of the “iShares” sector ETFs are run by BlackRock). The reason for the popularity of ETFs and index funds is easy to understand—they charge lower fees than a mutual fund manager. Plus, individual investors can buy an ETF or index fund like the SPDR S&P 500 ETF (SPY), which simply tracks the movement of the S&P 500, without having to go through a money manager—in essence, cutting out the middle man.

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Recognizing the shift toward passive investing, BlackRock has made the bold move to “consolidate a large number of actively managed funds,” targeting some $30 billion in assets. Seven of BlackRock’s 53 fund managers are expected to step down. CEO Laurence Fink called it “changing the ecosystem.”

Is this the beginning of the end for mutual funds in general? Perhaps. But there’s no point in waiting around to find out. If a portion of your hard-earned savings is tied up in mutual funds, get it out now! As we always say at Cabot Wealth, nobody cares more about your money than you. So why let someone else make your investment decisions for you—especially when you can pay less just by buying and selling stocks (or ETFs) via an online brokerage account?

Stock picking is our preference, of course. There are inherent risks and drawbacks to investing in ETFs, where a few bad apples can weigh down an entire sector, or index funds, which are only worth the investment when a market is red-hot. Picking stocks individually allows you to be more nimble, more specific, and more diversified.

That said, there are times when investing in ETFs makes sense. If you bought the SPY around the election, for example, you’d be sitting on a 13.4%, five-month return. Not bad. Some ETFs that track the right stocks in the U.S. infrastructure or energy sectors have performed even better since Trump was elected. The advantage of buying an ETF in a hot sector, you gain exposure to all that growth in one fell swoop.

Regardless of what you prefer—stocks or ETFs—what matters most is that you’re the one doing the picking, not some mutual fund manager you meet with a couple times a year. The largest asset management firm in the world is distancing itself from fund managers. You should too.

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Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .