Friday, April 30, 2010

Comparing Mutual Funds to ETFs

If you wonder whether the comparisons most often made between ETFs (exchange traded funds) and mutual funds are done without bias, you would be wrong.  To understand why these traded index funds continue sell their attributes based on cost alone is to miss the point.  While they do have very low fees, as all passively traded funds should, the believers in this investment tool trumpet their attributes but do so not by comparing them to the benchmarks they mimic but to a completely different type of mutual fund, the actively traded variety.
The actively traded mutual fund can be costly.  The reasons for these costs are often quite simple to grasp.  Actively traded mutual funds incur additional costs due to trading more frequently, the research required to make those trades, the assumed risk involved and of course the increased management of those portfolios.  Although it is common practice to use benchmarks as a way of determining performance of actively managed mutual funds, it is not often indicative of what the fund is attempting to accomplish and how many underlying securities are in the portfolio.
Actively traded mutual funds own only a portion of the benchmark (indexes such as the Russell 2000 or 3000, the S&P 500, or total market). More on this unfair comparison.


Seenath Kumar said...
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Seenath Kumar said...

I have enjoyed a lot while reading this post it's been quite informative thanks for sharing this post on mutual fund.