I just read an article in the WSJ called “Exchange Traded Funds appear in 401(k)s.”Some providers like WisdomTree Investments are rolling out funds invested in ETFs.
Keep in mind that these offerings are still in an infant stage and improvements should materialize once this market matures. This story alerts you to some of the pros and cons and also reinforces what I have been saying before: Many of the 500 ETFs are focused on small and narrow market segments and are, in many cases, more of a gamble than a long-term investment.
Should You Re-Invest Your ETF Dividends?
A few days ago, I posted about the tremendous increase in assets ETFs experienced over the past few years.
I also mentioned that, once pension plans and 401k make ETFs available to their investors, more money should flow in that direction. Several readers pointed out that a problem could be the transaction fees of ETFs for re-investing dividends.
I did not think that there were transaction charges for re-investing dividends; a call to my custodian (Schwab) confirmed that this in fact is true—no fees. If you have your assets housed with a different firm, you might want to verify this. Whatever you find out about this topic, I’d appreciate it if you would post your findings in the comment section below.
While on the subject, should you re-invest dividends at all? There are different views, and I understand all about compounding your earnings. However, if you are investing with a taxable account, you should definitely reconsider.
If you are invested in a no load fund or ETF that pays regular dividends, your year end basis calculations could be a nightmare, or at least require some time commitment on your part. Your tax preparer will not want to do it.
The other choice is, one that I favor, to let your dividends accumulate. They will earn interest in the money market portion of your account and compound that way. Once you have a more substantial amount collected, say a few thousand dollars, invest the lump sum.
This will also give you the opportunity to put your money in a different fund/ETF at that time, in case the one that generated the dividends is no longer a great performer.
Which No Load Fund Is better: CVGRX or CAAPX?
The following story made me chuckle because the answer surprised me and may surprise you as well.
MarketWatch had an interview with Morningstar mutual fund analyst Marta Norton. The point of the interview was Marta’s contention that funds should earn their place in your portfolio by “meeting future expectations” rather than past performance. As an example, she mentioned CVGRX and CAAPX.
Hmm. How do you do that?
Being a numbers person, I first compared the 2 funds against each other over 2 years, 5 years and 10 years. The 2 year comparison is shown below:
It appears that, based on those numbers, CVGRX is the clear winner. Add to that Morningstar’s (in my view useless) ranking of four stars for CVGRX vs. three stars for CAAPX and, to the casual observer, the case for CVGRX is further supported.
To prove her point, however, Marta put a hold rating on CVGRX suggesting that recent performance and asset growth could hinder future returns. At the same time, she put a Buy on CAAPX.
This is confusing. Morningstar has always promoted their star rankings as the ultimate in comparing funds before you buy. Has that now changed? Are they weighing other factors?
While I don’t subscribe to their theory, I thought it would be interesting to compare these funds side by side using the momentum data from my weekly StatSheet. Here’s what I found (double click to enlarge):
It’s obvious that, based on all momentum figures for our current buy cycle, CAAPX came out ahead.
Does that mean that Morningstar is now looking at shorter term numbers to identify funds with good growth potential or are they perhaps (anonymously) subscribing to my StatSheet? (Humor attempt)
Investment Management: Advisor-Sold Mutual Funds—Are They Worth It?
What I am referring to in this heading are not the mutual funds a fee-only advisor gets you into if he manages your portfolio; I am talking about those that a commissioned advisor sells you.
I ran across an article on the Motley Fool website, which is titled “Are Advisor-Sold Funds Ever Worth It?” It outlines some of the upfront, deferred and trailing fees commissioned advisors can charge.
It’ll help you to become a little more educated about the pros and cons of different advisor services. I am biased and believe that the only way that you can get truly unbiased advice is via a fee-only advisor.
How else can you be sure that a recommended mutual fund is truly in your best interest, and based on the advisor’s honest research result, rather than his (possible) motivation of receiving a large upfront commission?
No Load Fund/ETF Tracker updated through 5/11/2007
My latest No Load Fund/ETF Tracker has been posted at:
http://www.successful-investment.com/newsletter-archive.php
Despite Thursday’s sell off, the markets eked out another gain.
Our Trend Tracking Index (TTI) for domestic funds/ETFs now sits +5.59% above its long-term trend line (red) as the chart below shows:
The international index has now moved to +10.00% above its own trend line, as you can see below:
For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.
ETFs, Mutual Funds And The S&P 500
A few days ago, I wrote that the media does not like to include bear markets when reporting performance comparisons between mutual funds/ETFs and the S&P; 500.
Of course, I can’t read every financial paper in the universe, so my view is limited to those that I do read. Reader (and client) Nitin pointed out an article in the NYT that actually addressed the issue to a degree.
The heading was very appropriately named “Oops, It May Be Time To Rebalance That Portfolio.” It then goes on to explain the hardly impressive S&P; 500 returns when measured over the past 7 years.
Unfortunately, the article quoted John Bogle (founder of Vanguard) who is the icon of Buy and Hope investing. While his Vanguard 500 Index fund had big losses in 2000 and 2001 (how about 2002?), he would have broken even ahead of the S&P; 500 (in “only” 6 years as opposed to 6-1/2) because the fund reinvests dividends.
Yes, you are reading this right. Having had steep losses in the last bear market qualifies for boasting if your losses were slightly less than that of a similar index. How sick is that?
The article goes on to evaluate various portfolio allocations that would have broken even as early as the end of 2004. Sure, the benefit of hindsight…
Okay, then it’s time for the portfolio rebalancing act, where every ‘expert’ has a different opinion as to how it should be done. Articles like this make my hair stand up, because it’s the same drool I’ve been reading for about 30 years.
There never seems to be any change or improvement to dealing with the absurdities of Wall Street. How about this: Let’s try to avoid the brunt of a bear market altogether?