The Performance and Substitutability of ETFs and Mutual Funds
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The purpose of this study is to examine the performance of ETFs compared to mutual funds in different economic market conditions while determining if ETFs and mutual funds are substitutable with one another as investment vehicles. The variables observed in this study are volatility, returns, the effect of market conditions (bear and bull markets), sector investing, active versus passive investing, and fee structure. The study focused on ETFs and mutual funds in domestic, international, developed, and emerging markets. The goal is to be able to determine if ETFs or mutual funds provide a more significant benefit to the investor, or simply whether or not they are merely substitutable with one another. I spent a total of ten weeks interning for a fund named Exponential ETFs in Detroit. During the ten weeks, I absorbed myself in learning the ins and outs of ETFs. While working at the fund, I administered five interviews with professionals in the asset management industry, this data heavily contributed to my research findings. Through my secondary and primary research of ETFs and mutual funds, I found the following to be true: 1) ETFs are considered to be "mutual funds 2.0." 2) The performance of ETFs and mutual funds are reliant on their underlying investment strategy. 3) ETFs are not necessarily more volatile than mutual funds. 4) The passive nature and tax efficiency of ETFs allow ETFs to be more cost-efficient than mutual funds. 5) ETFs and mutual funds are substitutable in theory. 6) The innovation and cost efficiency of ETFs make them superior to mutual funds. These results provide valuable information to investors when deciding whether or not to invest in ETFs or mutual funds. This information can help increase the performance of investors' portfolios.