MarketWatch had an interesting story called “Sell All Your Mutual Funds!” It featured one of America’s biggest financial advisors telling his clients about “the lies that are placing your financial security in jeopardy.”
Apparently his new book uncovers some of the ways investors are being taken advantage of, and he uses no uncertain terms. While I have not read the book, I have for years fought with a variety of mutual fund companies about stupid policies designed to protect the firm but leave the investor holding the empty bag.
But should you really sell all of your mutual funds? To me, it’s a “depends” kind of question. If you are a Buy & Hope investor, then you should not pay year after year the fund expenses and remain in an underperforming fund, just because “you have been with them such a long time.” Unfortunately, that’s what many people do, which is one of the reasons for the above book promoting the sale of all mutual funds.
However, in my advisor practice, I still use both, no load funds and ETFs. To me it’s a performance issue and nothing else. When using our trend tracking approach, we try to be in the top performers according to a client’s risk tolerance. That means that we will not be in the same fund or ETF for many years, but only during those periods when the markets are in an up trend.
So, who cares if a fund has higher expense ratio as long as it performs well. Are there funds right now that are performing better than ETFs? Sure, my data base shows that, as of yesterday, the highest M-Index ranking for domestic ETFs was 14, while there were 9 no load funds that ranked higher.
For example, the top no load fund (in the domestic arena), according to my ranking, is WLGYX, in which we have a large position. There currently is no ETF that even comes close.
I am sure that the annual expense ratio is probably twice that of the nearest ETF. So what? I am in this fund for as long as the cycle lasts, the performance remains, and then I will get out. Viewing expenses in direct relationship to performance over a limited time will give you the best of both worlds.
There is no need to clutter your mind deliberating whether ETFs are better than mutual funds; use the tool that’s most appropriate at that point in time you are planning to invest.