Fabian: "A Paradigm Shift"
04/22/2005 12:00 am EST
Despite being an advocate of mutual funds for 25 years, Doug Fabian now says, "There is a paradigm shift going on that has led me to conclude that I may very well have bought my last mutual fund." Here, the the editor of Successful Investing explains his new "fund focus".
"The mutual fund industry has a lot of fat in it in terms of fees and commissions and that hold down the profits an investor can realize. The average management fee of a stock fund is 1.58%. That's pretty rich when you see that the average fund lost 2.5% last quarter alone. Mutual fund companies seem to be getting the message as 844 fund companies are cutting their fees. But it may be too little too late as investors have caught on to a much better way of investing that does not involve the higher fees and human frailty associated with actively managed-funds. I am talking about, you guessed it, ETFs.
"Exchange traded funds are tied to a given index that trade like stocks. That means that you can buy and sell ETFs throughout the day. You can also establish a stop loss. You can only buy or sell mutual funds at the day's closing price. There are 120 ETFs out there and they range from market indices to sector indices to bond indices. And the list continues to expand. The average fee for buying an ETF is 0.3%, a huge discount from what you pay for a mutual fund. Another benefit to ETFs is that your fund will never under-perform the benchmark because your fund is the benchmark. ETFs are just a better way to invest and people are starting to figure that out.
"For example, we would suggest that long-term investors use ETFs to invest in the energy sector. Energy has been the best sector over the last 3 years -- up 30%, year over year. I continue to recommend that my readers overweight energy up to 15% of their portfolio's value. To take advantage of this long term trend and to capitalize on rising energy prices, I continue to recommend an allocation to the energy ETFs such as iShares Dow Jones US Energy (IYE ASE) and Energy Select Sector SPDR (XLE ASE). You might want to check out iShares Goldman Sachs Natural Resources (IGE ASE), a natural resources ETF which is up 12% for the year."