Trend: ETFs are taking investors and funds from the mutual fund industry; the mutual fund industry is retaliating with actively managed ETFs.
Teeka Tiwari at The Tycoon Report sees managed ETFs as an attempt by the declining mutual fund industry to create stock-picking ETFs that are managed by their fund managers.
Link: The Tycoon Report - Teeka Tiwari - Sector ETFs: Still the Most-Profitable Way to Invest.
A recent article in The Wall Street Journal sang the praises of "managed" Exchange-Traded Funds (ETFs).
Don't be fooled by these "new" financial products. They are just old-fashioned mutual funds disguised as ETFs.
You see, the mutual fund boys have been hemorrhaging cash, as the ETF market has exploded in popularity. ETFs have just a fraction of the cost of a mutual fund and are infinitely more flexible.You can sell an ETF short, and you can also buy or sell options against it. Additionally, ETFs have immediate liquidity and utter transparency.
In other words, an ETF is truly the perfect investment vehicle.
As such, the guys running the "evil empire" back in mutual fund land are mad as all get out and want to get their cut of the action. So, their brilliant solution is to create "stock-picking" ETFs that are managed by their fund managers.
A group out of San Francisco is introducing "actively managed" financial, large-cap, technology and growth ETFs, although a few other groups have also made the foray into what I call this "Frankenstein ETF" market over the past year.
'Stock-Picking ETFs' Aren't the 'Real Thing'
OK, let's first take a look at costs. A typical ETF has a management fee of about 0.25%; some are a little more, and some are a little less. These new mutual-fund "Frankenstein ETFs" will have fees that range from 0.79% to 1.5%!
The effect of those fees over the life of a retirement portfolio is MASSIVE. Make no mistake -- if you are paying an extra point a year on a $100,000 portfolio over 30 years, it adds up.
Now imagine your account multiplied a several million. Are you starting to see why these mutual fund guys are licking their lips as they look at your portfolios? As far as these guys are concerned, your account is just another sheep waiting to get sheared.
Here's Why ETFs Rock
It's the uniform nature of ETFs that makes them so valuable. There is no discretion involved. If you want exposure to steel stocks, Internet stocks or oil producers, you can get it in a heartbeatin an ETF.
The majority of institutions buy and sell stocks by sectors, not on a one-by-one basis. Sector-specific ETFs allow us the ability to ride the coattails of that massive institutional buying.
The odds of making money in a stock go up dramatically if you are in the right sector. The odds of you making money go up even more if you own a basket of stocks in the right sector, rather than just one stock in the right sector. Studies have been written claiming that fully 68% of what goes into finding a winning stock is related to the sector it's in, and whether this sector is in-favor or out-of-favor.
The Easiest, Most-Effective Way to Invest
My own experience has borne that out to be true. Sector investing is the absolute easiest way to invest, and sector-based ETFs are the most-efficient vehicle to use if you want to play sectors instead of stocks.Stock-picking ETFs remove the statistical edge that sector-based, non-discretionary ETFs provide.
A quick look will show you that the vast majority of money managers can't even beat the S&P 500!Why the heck would we want them running a discretionary-based ETF? The short answer is, we don't!
By buying a Frankenstein ETF, you give up every edge, every advantage that a well-diversified sector ETF provides. "Frankenstein" is better as a movie, not as a portfolio strategy!
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