It may be a little premature to start thinking about New Year’s resolutions, but I want to plant the seed early. Now that we have re-entered the market and we have made a strong commitment to equities, it is imperative for you to consider making ETFs a part of your investing strategy. No longer are they the new kids on the block, ETFs have come into their own and have the market capitalization and the diversity to offer a compelling alternative to actively managed mutual funds.
Managed funds are just too expensive. They pay those fund managers a ton of money and it’s coming out of your pocket. And I’m going to let you in on a little secret: most of those fund managers are so nervous about not beating the benchmark of the index funds, that they just buy the index with most of the money and charge you a huge management fee. The differential amount that they invest using their own strategies will most likely not elevate the value of the investment enough to justify the added expense associated with those funds. It’s also important to remember that you are taking a risk in betting on those fund manager’s picks as they could just as easily drag your investment below the benchmark as raise it above the benchmark. In essence, by purchasing mutual funds you have a 50-50 shot at beating the index fund. You do, however, have a 100% probability of paying about five times more for a managed mutual fund than for a comparable ETF.
There are 189 ETFs and plenty of good choices for every type of investor. In fact, for most every type of mutual fund, you can find a corresponding ETF for about 1/5 of the fees.
Just look at the following comparison:
Fidelity Magellan v. SPY: both are large cap blend funds, which means they are a combination of growth and value. They both have as some of their top holdings GE, MSFT, Exxon, Citigroup and AIG, They both have comparable percentage allocations to specific industries. In short, these two funds are very similar to each other and their investments will track almost equally. In fact, at the close of yesterday’s trading, SPY was up .42% while Fidelity Magellan was up .39%. The one-year track records of the two funds are virtually identical. The only difference between these two funds is that SPY actually performed slightly better than Fidelity Magellan and SPY has an expense ratio of .11% which is nearly 1/6 of Magellan’s .7%.
Additionally, Fidelity Magellan is now a closed fund with a new fund manager who is committed to taking more risk to try and shake the fund out of the doldrums. There’s just no need for you to assume that extra risk because the fund manager is shooting for a miracle of restoring Magellan’s luster of yesteryear. Save your money, buy the ETF and sleep better at night knowing your money is following the index as opposed to the whimsical pursuits of a fund manager on a lofty mission.
There are mutual funds that concentrate on specific sectors, but so too, there are ETF sector funds as well. With few exceptions, you can easily find an ETF that will correspond to virtually every type of mutual fund out there. There are sector ETFs for technology, biotech, healthcare, energy, natural resources, building materials, real estate, consumer staples, international as a group and by country. Additionally, there are ETFs for large cap, mid cap and small cap and also value, growth and blend. There is just an abundance of ETFs for all investment objectives. There are even bear market ETFs.
I encourage you to make 2006 the year you actively get into the ETF game. To learn more about investing in ETFs, check out my special report entitled "From Mutual Fund Mess to ETF Success" at http://www.dougfabian.com/radio/store.jsp
WARM WISHES FOR 2006
My dear friends, we are entering into a very exciting time of year for our families and for the markets. I would like to extend my warmest wishes to all of my readers at the beginning of this festive season. I hope you all have a happy and prosperous end of year.