ETFs Are Gaining A Foothold In The 401(k) Retirement Plan Market

401k“Exchange-traded funds have been the hot thing in the investment world these days, but not among retirement plans.  That may be changing, as ETFs finally are gaining a foothold in the 401(k) retirement-plan market. According to estimates from BlackRock Inc., the largest sponsor of ETFs, investors hold at least $2 billion of its iShares ETFs in 401(k) plans after buying about $500 million in fund shares last year,” Ian Salisbury Reports From The WSJ. 

Ian Continues “Since iShares controls about half the ETF market, the figure suggests that in total there may be something like $4 billion of ETF assets in 401(k)s. That is just a tiny sliver of the more than $1 trillion in 401(k) assets invested in mutual funds, but it represents significant growth from several years ago, when ETFs were almost entirely absent from these plans. For ETFs, which resemble traditional open-end mutual funds but trade on exchanges like a stock, growth has been much faster than for the mutual-fund industry at large.”

“ETFs’ appeal is that they offer investors low costs and extra flexibility. Unlike open-end mutual funds, ETFs can change hands throughout the trading day. Since they mostly track indexes, which don’t tend to turn over much, and often swap stocks instead of buying and selling them, ETFs don’t tend to run up capital gains taxes that are passed along to their investors. Exchange-traded funds have struggled in the 401(k) market because retirement plans neutralize some of their key advantages. To keep brokerage commissions low, 401(k) plans typically pool many individual investors’ trades, eliminating participants’ ability to trade all day long. Also, retirement plans already allow investors to avoid capital-gains taxes, making ETFs’ tax benefits moot. The exchange-traded fund industry has been arguing that ETFs should still be added to plans because of their low costs,” Salisbury Reports.

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