Investment Funds

Exploring the Evolution, Structure, and Benefits of Investment Funds

History of Investment Funds

Investment funds trace their origins to the Netherlands in the 18th century. Historians credit the Dutch East India Company with creating the first pooled fund when it invited citizens to pool their resources to finance sea voyages. The returns from these voyages varied: successful expeditions could yield substantial profits, while less fortunate ventures often resulted in the loss of the entire investment due to shipwrecks and other maritime hazards, accompanied by the tragic loss of many lives.

Key Points to Understand:

Understanding rationale and mechanics.
The differences between open-ended funds and closed-ended investment funds.
The possible options that align with your investment goals.

From Early Beginnings to a Core Investment Vehicle

Just as the Dutch were seafaring pioneers, so the Americans have tended to lead in finance and investment over the past 100 years at least. Mutual funds, as we know them now, evolved in the U.S. in the 20th Century. The Massachusetts Investors’ Trust in Boston, launched in 1924, is often seen as the first mutual fund and still exists. Mutual funds gained massive popularity among U.S. private investors in the 1980s and 1990s, becoming a mainstream investment vehicle, particularly for individual retirement accounts like 401(k)s and Roth IRAs. In 2023, the US household ownership of mutual funds reached 52%.

Percentage of US Households owning Mutual funds
Global Households Ownership of Mutual Funds by Region
Total Net Assets of US-Registered Mutual Funds

Sources: Investment Company Institute Annual Mutual Fund Shareholder Tracking Survey and US Census Bureau.

Source: Investment Company Institute (ICI), Global Study 2024, FRED economic data St. Louis FED.

Sources: Investment Company Institute (ICI), OECD Statistics, FRED economic data St. Louis FED. (The data refers to Investment funds)

How Does an Investment Fund Work?

Understanding the Mechanics of Investment Funds

Going a bit more in depth into the dynamics of investment funds, they are divided into shares, where each one represents fractional ownership of the fund’s portfolio. Mutual fund shares are not traded on an exchange; instead, interested investors buy and sell through the fund management company or an authorized broker. These transactions normally take place at the end of the trading day, after markets have closed.

Investment funds operate by dividing their assets into shares, each representing a proportional stake in the fund's portfolio. When investor demand increases, the fund manager creates new shares; when demand decreases, shares are redeemed and converted back into cash. Essentially, investors contribute capital to the fund, and in return, they receive shares. The value of these shares fluctuates based on the fund's performance, reflecting each investor's proportional share of gains or losses.

Investment funds offer the following advantages:

Diversification
Access to Global Markets
Variety of Choice
Professional Management
Regulatory Oversight

Investment funds normally invest in a portfolio of many securities, reducing risk through diversification.

Access to global financial markets with a single purchase, including less liquid and more niche areas.

Investors can choose from a wide range of investment funds, tailored to different investment horizons, risk tolerances, and market exposures.

Investment funds are managed by professional fund managers, offering expertise and oversight without the need for individual investors to manage the technical aspects.

Investment funds operate under rigorous regulatory frameworks, designed to protect investors. Regulations such as the Markets in Financial Instruments Directive in Europe establish standards to ensure transparency and prevent inappropriate investment practices.

Additionally, national financial regulators – including Dutch Authority for the Financials Markets (AFM) in the Netherlands, and Financial Markets Authority in France – oversee investment funds to enforce compliance and safeguard investor interests.

This regulatory environment helps ensure that funds adhere to strict guidelines regarding communication and investment strategies, providing an additional layer of security for investors.

Structure and Investment Approach of Investment Funds

Investment funds come in various forms, each designed to meet different investment objectives. Whether you're interested in equities, bonds, real estate, or commodities, there's likely an investment fund that fits your needs.

Investment funds come in many variations:

Equity funds

which invest in shares (or stocks)

Bond Funds

which invest in bonds

Real Estate Funds

which invest in real estate, either directly by buying properties or indirectly by buying listed real estate vehicles, such as REITs

Commodity Funds

which invest in commodities such as gold, oil or coffee

Money Market Funds

which typically invest in short-term debt instruments and can be an alternative for bank deposits

Multi-Asset Funds

which typically invest in a combination of equities, bonds and other asset classes

The Costs of Investing in Investment Funds

Understanding Costs in Investment Funds

When evaluating investment funds, it's crucial to scrutinize the associated costs, as they can significantly impact long-term returns. Here’s a breakdown of the types of fees you might encounter:

Annual Management Fees

These are the primary fees paid to the investment manager for overseeing the fund. They vary depending on the fund and its share class. Retail investors often face higher fees, which can be up to 2% of the fund’s assets annually.

Operating Costs

These are additional expenses related to the fund's operations, including administrative and transaction costs. They can also vary by fund and may be up to 1% or more.

Performance Fees

Some funds charge performance fees, which are levied if the fund manager exceeds a specified benchmark. It’s important to be cautious with these fees, especially if the benchmark is relatively low (such as an interest rate), as this could lead to higher costs despite modest performance.

Cost transparency

Unlike mutual funds, ETFs typically have a “total expense ratio” (TER), which includes all the costs associated with managing the fund. This makes it easier for investors to understand the overall cost structure.

Over the past two decades, fees for both mutual funds and ETFs have generally decreased, reflecting increased competition and greater cost-efficiency in the investment industry. When choosing an investment fund, consider not only the potential returns but also the cost implications to make an informed decision.

Quantitative Example: Impact of Fees on Long-Term Returns

To illustrate the effect of fees on investment returns, consider a simulation comparing a mutual fund with high annual fees to one with lower fees, using the assumptions in the table below.

Details	Mutual Fund	ETF
Annual Fees	1.70%	0.4% (Total Expense Ratio)
Initial Investment	$10,000 over 30 years	$10,000 over 30 years
Annual Gross Return	6%	6%
Net Return	6% - 1.7% = 4.3%	6% - 0.4% = 5.6%
Future Value	$10,000 × (1 + 4.3%)^30 ≈ $35361.38	$10,000 × (1 + 5.6%)^30 ≈ $51276.4

Source: VanEck.
Annual fees based on average fees for equity funds, according to the report Costs and Performance of EU Retail Investment Products 2023.

Despite the same gross return, the lower fees in the ETF result in a significantly higher final value due to the reduced drag on returns. The difference underscores how fees can erode investment growth over time.

Exchange Traded Funds

The Innovative Evolution of Investment Funds

Exchange Traded Funds (ETFs) have revolutionized the investment landscape over the past two decades, offering a more flexible and often more cost-effective alternative to mutual funds. ETFs, introduced in 1993, are a sub-type of funds that offer the same advantages as traditional mutual funds, such as diversification, but with the added benefit of continuous liquidity. This means that, unlike mutual funds, ETFs can be bought and sold throughout the trading day. The ETF market has grown rapidly, with innovations such as sector ETFs and the recent launch of the first spot Bitcoin ETFs in the U.S.

The next section of this guide will provide more details on these features.

Key Differences of ETFs Over Mutual Funds

While both mutual funds and ETFs offer investors the ability to diversify across a range of assets, ETFs hold several advantages over mutual funds:

Cost Efficiency

ETFs typically have lower management fees compared to mutual funds, which can have a significant impact on long-term returns

Cost Transparency

The total expense ratio of ETFs includes all costs actually charged, whereas for mutual funds the operational costs might be opaque

Portfolio Transparency

All of an ETF’s holdings are published daily, whereas for mutual funds only the top holdings might be published, with both a time lag and at a frequency less than daily

Liquidity

ETFs are traded on exchanges throughout the day, allowing investors to buy and sell shares at market prices and to know the value of their holdings during market hours

Fee Comparison: ETFs vs. Index Funds

This chart compares the average fees of ETFs and index funds over the past decade. As seen, ETF fees have remained consistently lower, contributing to their cost efficiency and attractiveness to investors.

Average Fund Fees

Source: Morningstar, VanEck.

*The fee data presented in this chart is based on estimated averages sourced from Morningstar and is intended for informational purposes only. Actual fees may vary by provider, fund strategy, and other factors. Past fee trends do not guarantee future cost structures. Investors should conduct their own research and consult a financial advisor before making investment decisions.

VanEck Thematic ETFs

Concrete Examples

VanEck offers a range of thematic ETFs that allow investors to gain exposure to specific sectors and industries. Two of the most well-known ETFs offered by VanEck are the VanEck Gold Miners UCITS ETF (GDX) and the VanEck Junior Gold Miners UCITS ETF (GDXJ). Additionally, VanEck has introduced ETFs focused on cutting-edge themes such as defense and digital assets, including the VanEck Defense UCITS ETF (DFNS) and the VanEck Crypto and Blockchain Innovators UCITS ETF (DAPP). It is important for investors to remember that investing is subject to risk, including the loss of principal.

Investing Money

Diversification

Investment Funds

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