In a recent blog, I expressed the view that ETF’s were better investments than many mutual funds. A recent report on Mackenzie Financial Corp Canadian Shield Fund illustrates the point.
Nat’l Post July 13, 2011 This fund started up late 2009 and raised more money subsequently totaling just under $200 million. The fund was seeking securities ”with capital preservation and capital growth attributes” (a wonderful description of double-speak). Management PERFORMANCE fees for the recent year ended March 31 were $4.1 million.
The average annual return on this fund to investors was 1 ½%.
What Return on Investment to Expect from a Mutual Fund. Are ETF’s the Better Way?
The overwhelming majority of mutual funds do not perform as well as the index in which they are invested
Each year in most financial newspapers, a comparison of mutual fund performance for that year is published. Usually only the top 5 or 6% of all the mutual funds beat the indexes, and the rest do poorly as compared to the index in which they are invested. Yet most people still put their money in mutual funds.
They do this because the financial industry and all of the promotion that makes it sound so safe, and so profitable (which it is not). Is intended to make money for the managers of the mutual fund and not for the investor in the mutual fund. So there are all of these boasts published of how the benchmark was beaten and similar equally irrelevant statements that sound so positive, but are really just “doublespeak”. The next time someone boasts of a comparison to the “benchmark”, tell them that you just want to know if the value at the end of the period was greater than the value at the start of the period, and not to use all the doublespeak words.
Why People Invest in Mutual Funds
There are issues of safety in mutual funds. In order to supposedly be safe, mutual funds usually buy a cross-section of the top companies in their sector. This supposedly reduces risk. The other effect of this style of investing is that the mutual fund usually mirrors to a more or less degree, how the particular sector it is in does.
The next factor, is that enormous amounts of money are spent in advertising, in administration, in paperwork and so on. This money comes out of the money invested in the mutual fund.
Then the broker or other party that introduced you to the mutual fund must be paid a commission for that introduction which is normally between ½ and 1 % of the invested money. Then every year thereafter, that person has to receive another check or that person might convince you to take your money out and place it elsewhere, so that person gets another similar check every single year. Then of course, the manager must be paid. After all, he is the person that is supposedly making you money. So he gets between 1 & 2 % of the invested money each year as his reward.
Why Mutual Funds Usually Can’t Beat the Index
Now add up all of these costs (and the costs we didn’t mention) and you can see how difficult it is for a mutual fund to do better than the market.
Should you buy an ETF or Sector Mirror
The investor’s choice was limited. So the answer was to introduce ETFs. Today, it is a rapidly growing sector of the investment community.
In its simplest form, when you invest in an ETF, the ETF buys a tiny percentage of every stock in a particular index or market in strict proportions. The ETF charges for this service, usually between 30 and 90 basis points. That means less than 1% of the invested money. Compare this to the enormous costs incurred by mutual funds.
Therefore the ETF mirrors the market but only with a small amount taken off for fees. The idea is that if the market goes up, you have a far better chance of making money without the mutual fund siphoning off so much for their expenses and charges.
ETF’s have improved dramatically the chances of the average investor to make money. For many people, they are the answer. Today there are almost unlimited choices of ETF’s that will allow the investor to choose a sector, or a region, or an industry, or a currency, and so on.
How to Trade an ETF
What is even better, is that investments in the ETF’s can be bought or sold like stocks – immediately with no waiting period, and with very cheap commissions. Most are very liquid. For anyone that has a belief or a feel for investing, this is a good way to go.
