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Two Bits on ETFs and Mutual Funds

with one comment

It is nice to be back. I’ve been taking care of some personal stuff over the past few days. That said; let’s look at a few articles that have caught my eye since Friday.

First, while you are busy funding your IRA or 401k, your broker and the mutual funds take cuts out of your investment. The hope is that they can exceed this in the overall growth of your investment. Sometimes they may swing for the fences, leveraging themselves to the hilt (the case with many hedge funds), and miss. Greg Wolper at Morningstar wrote yesterday about a different situation: how fund managers (aka “Smart Money) can–for lack of a better term–get into bed with the companies they’re buying.

Specifically, he points to the case of Cerberus’ investment in GMAC, Chrysler, and others (see articles from the Financial Times here). While regulators are stepping in here, what can the average investor do? Is there any way to determine the strategy of a fund manager and to insure they are going about their business professionally? The Wall Street Journal has an occasional report on mutual funds that features fund manager commentary. These managers are the statistical anomalies, though, with returns (generally) well above average.

From this, the author moves to ask the question of how the average investor can determine the strategy of their fund managers. If it is a follow-the-leader strategy, the fund manager is probably slightly behind the returns on the index tracked by the fund. (See any fund’s prospectus for this information. It should be plainly spelled out.) Also, look at the fund management’s descriptions of the market environment of the fund. These are often found on the fund’s website. For example, here is one for Annaly Capital Management, Inc. (a REIT). Red flags should go up if the manager (or management) cannot explain what they are doing based on current conditions with a reasonable degree of clarity. Managers won’t tell you that they’re buying something on the basis of what a friend said, but it should be of some comfort that they are able to marginally sell you on it.

The second article comes from Index Universe, where Matthew Hougan writes on what ETFs really bring to investors. After a bit of discussion, he narrows it down to two things:

  1. Tax efficiency, and
  2. Easy access to high-caliber investments in new asset classes.

Easy examples of number two are the United States Oil (USO) and other ETFs previously mentioned on this site (see links below). Hougan gives a more exhaustive list as well:

Today, you can buy the entire stock market for 7 basis points, and you can also buy into commodities and real estate and timber. You can buy Treasuries, and you can also buy global TIPS, sophisticated quant strategies and buywrite funds. You can buy currency exposure, and you can also get leverage, sell short without using a margin account and tap into the carry strategy.

And the author means YOU, the independent investor that doesn’t have the millions required to invest in complex securities, hedge funds or venture capital. Now we just have to figure out how to invest in them properly!

Disclosure: at the time of publishing this, I do not own any securities specifically mentioned in the post.

Also, thank you to all the visitors looking at my posts on ETFs (especially here and here). If you have any questions, comments or ideas to add to the discussion, please offer them up!


Written by walonline

June 18, 2008 at 5:16 pm

One Response

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  1. It seems like every week Wall Street comes up with some new, exotic investment idea that puts your money at risk. Mutual Funds


    June 19, 2008 at 9:28 am

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