With the explosion of Exchange Traded Funds (ETFs), one of the more frequent questions I get is whether ETFs are better than mutual funds.
The issue has been somewhat distorted by several large investment management firms and newsletters proclaiming that “we will never buy another mutual fund.”
I think that this is a little extreme, because there is a place for both in an investor’s portfolio. Sure, ETFs are a great tool, especially in view of the fact that many fund companies have given new meaning to the word “arrogance.” Short-term redemption fees and ridiculous trading restriction have rightfully led many in the direction of ETFs as the investment vehicle of choice.
However, while I use ETFs in my advisor practice as well, I usually limit myself to their use in those investment orientations that are more short-term by nature, such as sectors and countries.
Using my trend tracking methodology, I have found that mutual funds (no load) tend to perform better in the early part of a new up trend, such as we’ve seen after the market meltdown during May/June 2006. ETFs seem to lag a little, which is understandable. After all, they are broad indexes and as such they need their underlying securities to establish a direction first before they follow the trend.
New ETFs are being brought to the market almost daily. Should you buy them right away? That depends on if you are gambling or investing. I personally like to see at least 9 months of price data, so I can monitor where trend is headed before making a commitment.Contact Ulli