Fabian: Fund Folly?

08/05/2005 12:00 am EST

Focus:

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

"I was an advocate of mutual funds for over 25 years, but that time is behind us," says Doug Fabian. Here, he explains the reasoning behind this "revolutionary" statement, and discusses the opportunities he now see ahead in the world of ETFs.

"With very few exceptions, the only people who are making money in mutual funds are the people managing them and the people selling them. Fund managers have to stay nearly fully invested, even in a down market. You know sometimes the market just stinks and you just want to jump to the sidelines to preserve your principal? Well, fund managers don't. In fact, they can't. Part of their rule book dictates that they have to stay in the game even if they're just there to ride it down. Now, if you have your money sitting in one of these funds, that's what you're going to do too. You're going to ride it down-as so many mutual fund investors have over the last five years.

"More than 100 million people own mutual funds in this country. A whopping $8 trillion bucks is invested in them. Those are just staggering numbers. Another staggering number is that 80% of those people are in underperforming funds, as management fees hold down the performance. But, there is not a single ETF that is underperforming the benchmark, because ETFs are the benchmark. If you are stuck on owning mutual funds, the two best fund families are Vanguard and American Funds. They are well-managed and charge low fees. And, if you are looking for absolute safety, I recommend the American Century Capital Preservation Fund (CPFXX) that invests exclusively in T-bills, so there is zero risk and a return that follows rising rates.

"As for the current market, all the pundits are bullish, bullish, and bullish. I really don't consider myself a contrarian by nature, but I am just leery of jumping in when everybody yells to jump in. If you are currently invested, watch your positions carefully. We have been in a sideways market for some time and I really don't have a lot of reason to believe we are in a breakout posture. If you have been sitting on the sidelines and not invested in the market, now may not be the best time to load up here because we could see some profit-taking from here.

"Energy and mid-cap value are both strong sectors of the market at this time. Energy has pulled back from its recent highs. I would view a pullback as a buying opportunity. The two funds I like in that sector are iShares Energy Trust (IYE ASE)and Select Sector SPDR Trust Energy (XLE ASE). Additionally, in the mid-cap value arena, a good fund is iShares Trust Mid-Cap Index (IJJ ASE). This fund is up 7.6% year-to-date with the S&P up about 2% for the year. Please remember, the most important step to take as an investor is to have a strong sell discipline with no more than a 10% trailing stop loss."

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