Investment & Financial Articles
Title: No Load Mutual Funds or Exchange Traded Funds (ETFs)?
Author: Ulli G. Niemann
Article:
If you are fed up with early redemption charges and ever
increasing mutual fund management fees on top of bad-performing
fund managers, read on. There is a quiet revolution going on in
the no-load mutual fund industry and you, the individual
investor, may benefit from it greatly.
I am referring to Exchange Traded Funds (ETFs), which have been
around for years, but have grown tremendously since their
inception. There are currently over 100 choices with around $10
billion in assets.
In a nutshell, an ETF is a specific kind of no-load mutual fund
that you might consider to be a basket of stocks. ETFs are
diversified like mutual funds, only they trade like stocks. They
are cheap to trade (as low as $8.00) and don't hit you with any
short-term redemption fees. And they offer investing
opportunities across the board.
ETFs track every index under the sun including the S&P 500, the
Nasdaq 100, The Russell 2000 and many others. Available through
any discount broker, they basically fall into one of three
categories: broad-based U.S. indexes, sectors and international.
The have esoteric names such as iShares, StreetTracks, HOLDRs
and SPYDRs. The difference is in the index they are tracking and
the company marketing them. You will see big name companies
offering them, like the American Stock Exchange, Barclay's
Global Investors, Vanguard, and State Street Global Investors.
In my newsletter I track the currently most appropriate ETFs for
you to consider. For more detailed information you can visit
these web sites:
www.nasdaq.com www.amex.com www.ishares.com
In addition to inexpensive trades and no short-term redemption
fees, how else can ETFs save you money vs. no load mutual funds?
One way is on their annual management fees. That fee for ETFs is
in the area of 0.45% vs. 1.5% on average for no load mutual
funds. The fees charged by discount broker are so low they
almost can be disregarded, usually less than 0.1% of the
transaction.
For example, I have used ETFs for some managed account clients
during my last Buy cycle, which started on 4/29/03, and paid $27
for a $28,000 order - and that wasn't even with the cheapest
discount broker.
So, if these ETFs are so great, why hasn't your broker or
financial planner recommended them to you? Simple! Brokers, and
those advisors working on commissions, don't make money on ETFs;
no commissions up front or hidden on the back end. It's simply
not in their interest to promote them.
With all the positives for the investor, there is one
disadvantage, which may not be applicable to you unless you are
a hot shot no load mutual fund picker. It is that in any given
economic environment really super performing mutual funds can
outperform the indexes, but an ETF can never outperform the
index it's tied to. You would need to look at your own
investment record to know whether this is a downside for you.
Here's a real life example from my advisory practice. My trend
tracking indicator signaled a Buy on 4/29/03. Based on my
momentum indicators I chose 5 no load mutual funds and 4 ETFs.
Over the following 3 months my ETFs gained anywhere from +10.02%
to +22.36%, while my no load mutual funds gained from +9.15% to
+36.35%. If you're fortunate enough to make a superior selection
you will outperform an ETF. Of course, that presumes you picked
a very successful fund as compared to only a moderately
successful ETF.
A word of caution! Just because ETFs are cheap and easy to buy
doesn't mean they will guarantee you a profit. You can lose
money with them just as easily as you do with no-load mutual
funds. You still need to make sure you have a disciplined
methodology in place to help you get into and out of the market.
If you don't, you're gambling no matter what you invest in.
Having gotten the disclaimer out of the way, hopefully these
insights into ETFs will broaden your perspective on ways you can
prosper in your investments.
© Ulli G. Niemann
About the author:
Ulli Niemann is an investment advisor and has written about
methodical approaches to investing for over 10 years. He avoided
the bear market of 2000 and has helped countless people make
better investment decisions. Subscribe to his free newsletter:
www.successful-investment.com
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