Exchange Traded Funds (ETFs) are growing. Investors are choosing low annual expense and market return over high annual expense and promised performance.
Total ETF inflow is growing faster than Mutual Fund inflow. ETF inflow grew from $42.5 billion in 2000 to $54.4 billion in 2004. In contrast, mutual fund inflow fell from $309.4 billion in 2000 to $180.3 billion in 2004. Standard & Poors Depositary Receipts Trust (SPY) is the largest and oldest ETF. From the one fund SPY started in 1993 the number of ETFs has grown to 150 in 2004.
Growth of ETFs is fueled by investors searching for market performance. About 20% of conventional mutual funds do beat the market. The puzzle is which funds will win, in the future. ETFs, on the other hand, have a reasonably good record of matching the performance of their underlying index. For instance, in 2004, SPY value grew 10.92% and the value of the underlying S&P 500 index grew at 10.88%. The promise of the conventional mutual fund is that it will deliver superior results. The promise of the ETF is that it will match the performance of its underlying index.
Expense for ETFs is less than for conventional mutual funds. A prime reason for the mutual funds' higher expense is that pros perceived capable of superior results are more expensive than technicians paid to duplicate the holdings of an index. ETFs are passive investments and don't require the active management of pros. Investors moving money from mutual funds to ETFs are trading promised performance and high expense for market returns and low annual expense. ETFs generally have expense ratios below 1. SPY's expense ratio is .12. Expense ratio is percent of assets consumed by fees annually.
Investors sticking with mutual funds have a couple of things going for them. Eliot Spitzer has used his New York State Office of Attorney General to scare/shame mutual funds into minding fiduciary duties to their investors. The growth of ETFs is pressuring mutual funds to reduce their expenses and to introduce ETFs mimicking mutual funds. Investors sticking with mutual funds might benefit from the growth of ETFs. However, mutual funds might have a hard time delivering. Slowing growth or actual decline in fund size will make it difficult to reduce their expenses enough to keep investors happy. The more investors defect the fewer left to share the expense.
ETFs trade like stock equities. They can be bought and sold whenever the market is open. They can be shorted, purchased on margin, and optioned. Most brokers charge a commission for every buy and sell transaction. This can be a problem for small investors building a portfolio with monthly contributions. There is at least one broker that charges an annual fee rather than per trade commissions.
ETFs are passive. They only trade when changes are made to the composition of the underlying index. Fewer trades mean less tax consequence. Mutual funds often have taxable capital gains, sometimes even in years when the fund has declined in value (sell winners and hold losers).
That 20% of mutual funds beat the market is a premise. It assumes multiply years and a market defined as the S&P 500. Meg Richards writing for The Associated Press reported that for 2004:
- The S&P500 bested 61.6% of actively managed large-cap funds.
- The S&P400 bested 61.8% of actively managed mid-cap funds.
- The S&P600 bested 85% of actively managed small-cap funds.
The probability of a mutual fund having beaten the market in 2004 is low. Of course, relative performance changes from year to year. Relative performance, of active versus passive management, changes. Relative performance, of individual actively managed funds, changes.
The best ETFs strategy for small, beginning, busy investors is to 'buy and hold' SPY. If you are bigger, experienced, or have time on your hands you can try a more active strategy. A strategy that beat the S&P500 over the last three years is to hold equal amounts of five large diversified ETFs and rebalance weekly. This strategy is in some ways just an expansion of our definition of 'the market' beyond the S&P500. This strategy since inception 3 years ago has beaten the S&P500 just over 1% annualized. This small gain means rebalancing weekly is only viable when it is without trading cost. A more aggressive strategy is to monitor 50 ETFs and hold the most oversold, rebalancing weekly. This strategy since inception 2/27/04 has beat the S&P500 by 16%.
Remember. ETFs' popularity is on the rise. They trade like stocks. They have lower annual expense than mutual funds. Their objective is to mimic the performance of an index. They don't beat or lose to the market, they are the market. It is usually best for low maintenance, 'buy and hold' investors to define the market as broadly as possible.
Lyle Wilkinson, investor, trader, author, MBA Helps individuals learn to self direct their stock portfolios. Book, e-book, PowerPoint "DIY Portfolio Management" http://www.diyportfoliomanagement.com http://www.diyportfoliomanagement.com
Wood Dale Chicago prom limo .. Lockport Chicago limo O’HareThere is a famous cliff on the ocean in Acapulco... Read More
Using Swing Trading Strategies and Technical Analysis when Trading Stocks... Read More
Recently I watched my favorite football team lose a vital... Read More
Money: the most charged word in the planet. It means... Read More
I constantly hear the talking heads on CNBC-TV, the radio... Read More
What is leverage?Here is a definition of leverage from an... Read More
Today's society gives special recognition to alcoholics, sexaholics, binge-aholics, shopaholics,... Read More
AS BUILDERS BEGIN WORK ON THE FREEDOM TOWER in New... Read More
In one of my previous articles (Investing in the stock... Read More
Mutual funds were moderately successful in creating a presence in... Read More
As a novice trader, you'll often feel the need to... Read More
When will the stock market stop going down and start... Read More
The stock market has been in an up trend for... Read More
Two weeks ago I wrote about what the Securities and... Read More
Fundamental analysis.Fundamentals analysis says the best way to predict the... Read More
Yesterday I received my monthly issue of MONEY magazine. This... Read More
Do you have a financial planner? Does one of your... Read More
I know there are a lot of you out there... Read More
When it comes to buying a stock or mutual fund... Read More
If you are fed up with early redemption charges and... Read More
Stock trading remains a very competitive field and the stock... Read More
I go to the Money Show every year to visit... Read More
As the man said, "I've got some good news and... Read More
The following are a list of nine things you want... Read More
So you're started trading, you bought some positions with your... Read More
Antigo wedding limo ..If you want one.And I don't recommend any broker with... Read More
Carefully thinking through your goal as a trader is of... Read More
I am sure that if you have a brokerage account... Read More
For weeks, no, months we have been bombarded with nothing... Read More
We all know the expression, "My country, right or wrong",... Read More
You have decided to buy some stock or mutual funds,... Read More
Maximizing a stock market investmentThere are several factors an investor... Read More
"If you don't know where you are going, any road... Read More
Has your broker been calling you recently with the "great... Read More
One Saturday morning, while he was sitting at his computer... Read More
Wouldn't it be nice if you were only in the... Read More
Today we are inundated with tons of information about the... Read More
For years investors have been taught to look into the... Read More
There can't be many traders who haven't at least considered... Read More
Ever jumped out of an airplane? It's OK if you... Read More
Look back over the years and try to remember how... Read More
Sometimes the best way of lowering exposure to risk is... Read More
1. Do not spread your money too thin.My friend has... Read More
Duck! No I don't mean a quack, quack. I meant... Read More
You may have wondered why your mutual funds have been... Read More
The stock market is very unstable at this time going... Read More
One of the things people are always asking me is... Read More
The trash business in its efforts to cook their books... Read More
Now that you have some money burning a hole in... Read More
The Winter Games for the Olympics are coming up soon... Read More
Stocks & Mutual Fund |