MUTUAL FUND ARTICLES BY ULLI G. NIEMANN
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No Load Mutual Funds or Exchange Traded Funds (ETFs)?
By Ulli G. Niemann
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 brokers
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