why are ETFs better investment options for managed accounts (asset allocation models) than mutual funds?
There are several advantages ETFs have over mutual funds as investments for asset allocation models. Primarily, ETFs are required to maintain a 99% correlation to their index. Mutual funds average 4-5% in cash, which creates a cash drag on the returns and have style drift from the index. As an example, the AIM Mid-Cap has only 73% of its assets in mid-cap stocks, 6% in cash and 21% international stocks. Therefore, the fund has different returns (style drift) than the mid-cap index. Using mutual funds in asset allocation models corrupts the asset allocation model. Do ETFs reduce the fiduciary liability for fiduciaries? Yes. Language contained in the American Law Institute’s Restatement of the Law Third, Trusts, which serves as the basis for the Uniform Prudent Investor Act states: “A trustee’s departure from valid passive strategies may actually increase the trustee’s burden of justification and continuous monitoring.” Don Trone, president of the Foundation for Fiduciary Studies stated,