Investor's advice: Take exchange traded funds over mutuals

August 20, 2013 

It is time once and for all to put to rest the mutual fund myth. The fund industry is huge, with several trillions of dollars of investors' money. They have been the go-to investment for thousands of investors throughout the years. They have offered diversification, ease of purchase and professional portfolio management.

They are also known for their high expenses, index hugging, poor performance versus an unmanaged index of similar securities and they perform no better than an unmanaged index in a down market. Yet investors continue to invest in them.

I propose that we will experience a dramatic decrease in the number of mutual funds in the future. We are already seeing a shift to exchange traded funds, ETF's that, in my opinion, will continue to accelerate.

The facts are simple. Mutual funds do not con

sistently outperform their comparable index. This is particularly true with the large well-traded companies. If taxes are to be considered, the difference between them are even greater. The difference may not be as great for medium size companies but it is still large enough to wonder why anyone would continue to invest in mutual funds in this space when an unmanaged index fund would outperform in the majority of cases. This holds true to a lesser extent with small company stock. The more efficient the market, the less value an active mutual fund manager can add. It's that simple.

Add to that the fact that fund managers, to give the impression that they add value, may often buy and sell rapidly. The result is to increase your tax burden. With ETFs there is no active management. There is little buying and selling and therefore little taxation. Since ETFs trade like individual stocks, not until you sell them yourself will you incur a possible tax situation.

Fees tend to be much higher for many mutual funds versus exchange traded funds. One of the keys to successful investing is to keep your cost low.

It is very easy for someone to be confused by all the conflicting data regarding mutual funds. It can be relatively easy to compare a mutual fund you currently own or are contemplating owning. Try this. Get the symbol for the fund of interest and plug it in to one of the many free online financial websites available. Yahoo Finance is one. Then click on the interactive chart feature that will chart the funds' performance for ytd, 1 year, 3 years, 5 and lifetime. Then compare that to an ETF in the same asset group.

Or simply use one of the major indexes that will appear in the drop down box. Compare the different time frames. If the mutual fund in question does not outperform that ETF, and most won't, don't buy it. Buy the ETF.

Mutual funds investing in small companies, emerging market companies and special situations may offer value for the more aggressive investor. But for the majority of investors, exchange traded funds are superior to their mutual fund brethren.

The smoke and mirror antics, slick advertisements, high fees and poor performance of many in the mutual fund industry will, in my opinion, continue to shrink the industry.

It's time to realize the emperor has no clothes.

Michael T. Doll, an investment adviser with the Longboat Key Financial Group, 6350 Gulf of Mexico Drive, Longboat Key, can be reached at 941-383-2300 ext. 6, or Michaeltdoll@longboatkeyfinancial.com.

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