Investment Basics - Mutual Funds and ETFs

Relief association trustees and brokers occasionally have questions about portfolio limitations for mutual fund investments. Mutual fund investment authority depends on whether a relief association is investing under the limited list or the expanded list of authorized investment securities. Many relief associations consider investing in exchange traded funds as an alternative or in addition to mutual funds. This edition of Investment Basics provides a brief comparison of these two investment options. Relief association trustees should consult an investment professional for specific assistance regarding the relief association’s options and investment portfolio.

Description

Mutual Funds are created when investors give money to a fund management team for investment. This team invests the pool of money in assets, such as stocks or bonds. Investors purchase shares of mutual funds through a broker or directly from a mutual fund firm. Mutual funds are only bought and sold at the end of each day. Prices are determined by the daily ending value of all assets that make up the particular mutual fund.

Exchange Traded Funds (ETFs) are created when an investment firm forms a fund from a bundle of assets, such as stocks or bonds. The fund that is created usually tracks an index, like the S&P 500 Index. Once the assets are formed together, creation units are made. Creation units are large blocks of shares that are split up and traded on the open market. ETFs are traded on exchanges in the same way that individual stocks are traded. ETFs can be bought and sold at any time during the day. The price is determined by the price of the assets making up the ETF at the time of the transaction.

Costs and Fees

Mutual fund investors may be charged fees depending on whether the shares were purchased directly from the fund or through a broker. Generally, shares that are purchased from a fund can be no-load, front-end load, or back-end load funds. No-load funds do not charge a fee for an investor to buy shares of that particular mutual fund. Front-end load funds charge a fee that is generally five percent or lower of the initial investment amount. Back-end load funds charge a fee when the investment is sold that also is generally five percent or lower. Additional fees may be charged when mutual funds are purchased from a broker.

By contrast, ETFs do not charge front-end or back-end load fees. However, ETFs are traded on open markets and are subject to brokerage commissions for each transaction made. ETFs also generally have lower expense ratios than mutual funds. Expense ratios reflect the operating expenses, advisory fees, and administrative costs that are charged to investors. 

Dividends

When investors earn dividends from mutual funds, the dividends can be automatically reinvested to buy more shares of the mutual fund. These reinvestments are done at no extra charge to the investor.

Dividends earned on ETFs are placed into the investor’s brokerage account. If the investor wishes to reinvest these dividends, a brokerage fee is usually charged.

Investment Authority

Relief associations that meet at least one of four statutory conditions may invest under an expanded list of authorized investment securities. The four conditions are:

  • Having Special Fund assets with a market value in excess of $1,000,000;
  • Using the services of an investment advisor for the investment of at least 60 percent of the relief association’s Special Fund assets, calculated on market value;
  • Using the services of the State Board of Investment (SBI) for the investment of at least 60 percent of the relief association’s Special Fund assets, calculated on market value; or
  • Using a combination of the services of an investment advisor and the services of the State Board of Investment (SBI) for the investment of at least 75 percent of the relief association’s Special Fund assets, calculated on market value.[1]

Relief associations that do not meet any of the four conditions above are restricted to a limited list of authorized investment securities. Permissible investments for a limited list plan are identified and described in Minn. Stat. § 356A.06, subd. 6. Permissible investments for an expanded list plan are identified and described in Minn. Stat. § 356A.06, subd. 7.

Limited List Investment Authority

Relief associations that are restricted to the limited list have two ways in which they may invest in mutual funds and ETFs. First, limited list relief associations have authority under Minn. Stat. § 356A.06, subd. 6(f), to invest in shares of open-end investment companies, provided that the investments comply with paragraphs (c) to (e) of that subdivision.

In effect, this means that relief associations investing under the limited list have authority to invest 100 percent of their portfolio in mutual funds and ETFs, provided that the underlying assets of the funds are solely invested in directly-permissible limited list investments, which includes investment grade bonds, government debt, and insured certificates of deposit and savings accounts.

Second, relief associations investing under the limited list have additional authority under Minn. Stat. § 356A.06, subd. 6(g), to invest up to 75 percent of their portfolio in mutual funds as long as the underlying assets of the mutual funds consist of investments authorized under paragraphs (c) through (g) of the expanded list. This statute allows limited list relief associations to invest in certain types of expanded-list investments, through mutual funds, that they otherwise would be prohibited from investing in. Therefore, relief associations investing under the limited list may invest in mutual funds with underlying assets consisting of investment grade bonds, government debt, domestic and developed market corporate stock, real estate investment trusts, and any other investment as authorized and restricted by Minn. Stat. § 356A.06, subds. 7(c-g).

Expanded List Investment Authority

Relief associations meeting the requirements to invest under the expanded list of authorized investment securities have authority under Minn. Stat. § 356A.06, subd. 7(b), to invest in mutual funds and ETF investments, provided that the investments comply with limitations of that subdivision.

In effect, this means that relief associations investing under the expanded list have authority to invest 100 percent of their portfolio in mutual funds and ETFs, provided that the underlying assets of the funds are directly-permissible investments under the expanded list.

Additional Resources

More information can be found in our Pension Investment Basic Series found in the Investment Basics Topic.

Additional information is provided for in a Statement of Position on Relief Association Investment Authority and in another Statement of Position on Relief Association Investment Policies.

[1] The investment advisor must be registered with the Securities and Exchange Commission in accordance with the Investment Advisors Act of 1940, or registered as an investment advisor in accordance with sections 80A.58, and 80A.60.  See Minn. Stat. § 356A.06, subd. 6.

Last Updated May 2024