ETFs have been around since 1993, but their popularity has soared in the past few years as more company 401(k) plans are offering them as an option. The total amount of funds in ETFs totaled $200 billion about ten years ago and investors could only chose from a few dozen options, said Wayne Connors, chief portfolio manager of 401k Investor, a Hartford, Conn. company which allows investors to build their own portfolio using ETFs within their existing retirement accounts. Assets in ETFs now exceed $1.7 trillion, and there are over 1,500 ETFs for investors to choose from.
ETFs are an "advantageous way" to invest for retirement since the fees are much lower than traditional mutual funds and trade like a stock by tracking an index, a commodity or a group of assets, he said.
The annual expense ratios for ETFs are consistently lower compared to mutual funds in the same investment category. The money saved by 401(k) participants from lower investment fees can translate into a substantial increase in retirement income.
"Employees can lose up to $200,000 in their retirement account over their working career due to hidden fees they may not even be aware of," Connors said.
More employers are now offering ETFs as investment options within company 401(k) plans, and some companies such as Apple have chosen ETFs to be the only choice within their 401(k) plan.
Since the onset of the 2008-09 financial crisis, more demand for financial transparency has been sought. ETFs disclose their portfolio holdings on a daily basis, making it easy to quickly identify underlying holdings. On the other hand, mutual funds only disclose their holdings quarterly or semi-annually.