Are ETFs better than Mutual Funds?

Ulli Uncategorized 5 Comments

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.

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Comments 5

  1. Happy New Year Ulli,

    I realize your question is ETFs vs. mutual funds, but the question ignores the large class of CEFs, Closed End Funds. If you go to Bloomberg’s Investment Tools and choose “Fund Center,” you will see that, as regards performance, CEFs dominate their mutual-fund brethren in almost every class. You can start by looking at “Income Equity” funds or “Balanced” funds. Personally, I use CEFs a lot more than mutual funds–to good results. And, best of all, many of the CEFs can be purchased at a discount.

    DC

  2. That’s a very good point. Most investors never get involved in CEFs; I personally only use the tax-free kind.

    However, whichever investment vehicle you prefer, it’s important to have an exit strategy and not wait for the next bear marekt to pull your portfolio down.

    Ulli…

  3. Hi Ulli – you introduced us to ETF’s through your weekly statsheet, and one of your fast-trac suggestions led us to closed end funds, which we’d never heard of. As a result we have done very well. We now hold about 6 ETF’s in addition to 4 mutual funds, and are keeping a tight watch on our two extremely high flying ETF’s(China funds). Our trailing stop is 5%.

    We are now exploring ways of investing in those closed end funds which are fairly volatile – by buying in at a discount and selling at premium. Any blog-thoughts on this will be much appreciated.

    Thanks for breathing new life into our investing – Jane

  4. Jane,

    I am glad that you were able to utilize my weekly StatSheet and improve your investing horizon. Knowing that, makes it all worthwhile for me…

    Closed end funds (CEFs)are generally not more volatile than open ended funds or ETFs. However, buying one just because you can purchase it at a discount can be hazardous to your financial health.

    A CEF can stay at a discount for a long time or it can even be disounted furhter. As with any investment, you need to have a more of a strategy/reason for establishing a position as well as setting your exit point.

    Upward trend in the market or improved momentum figures are all valid reasons — just buying a CEF because it is traded at a discount, it not.

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