Jump to content



Photo

Being Street Smart 5/14/4


  • Please log in to reply
No replies to this topic

#1 TTHQ Staff

TTHQ Staff

    www.TTHQ.com

  • Admin
  • 8,597 posts

Posted 14 May 2004 - 04:03 PM

BEING STREET SMART
____________________

Sy Harding


AN ALTERNATIVE TO TARNISHED MUTUAL FUNDS. May 14, 2004 During the 1990s bull market, mutual funds became the most popular method of investing in the stock market. The growth of their popularity can be seen in the statistics. As the long secular bull market got underway in 1982 there were only 539 available funds. As the stock market rose, and more and more new investors became interested, the number of available funds grew apace. By 1998 new mutual funds were being introduced at the incredible rate of more than one per day, with more than 12,000 available by early 2000.

In the early going, mutual funds were mostly offered as a means of owning an instantly diversified portfolio, with the portfolio managed by a professional stock-picking manager. But as time went by, new funds, looking for niches where they could be unique, offered opportunities to invest in various market indexes, individual industrial sectors, and international markets. Some, like Fidelity’s Select Funds, and Invesco’s Strategic Funds, were introduced as specifically designed for short-term trading. (Both companies extended minimum holding periods after they had pulled in a few tons of investor money). Eventually mutual funds were introduced that were designed to move opposite to the stock market. Described as bear-type funds, they rise in price as the stock market declines. Overall, by 1999 there were more mutual funds for investors to choose among than there were individual stocks listed on the NYSE and Nasdaq combined.

Unfortunately, as we learned from the recent mutual fund scandals, the good times for mutual funds led to the same kind of greed and investor abuse that took place at brokerage firms, investment banks, and corporations.

The reputation of mutual funds has been further tarnished in recent months by the many that have begun imposing minimum holding periods of up to six months, with investors charged penalties if they withdraw their money sooner, even if they want to do so to avoid a further loss in a plunging market.

The situation has investors increasingly upset, not knowing where to turn. Yet apparently very few are familiar with an alternative that is in many ways superior to normal mutual funds. The alternative is exchange-traded-funds (ETFs). They’ve been around for several years. Yet brokerage firm Ameritrade recently conducted a survey of investors, and reported that while the majority considered mutual funds and individual stocks to be good investment vehicles for the stock market, fewer than 5% considered Exchange Traded Funds (ETFs) to be in that category. Similarly revealing regarding investors’ unfamiliarity with ETFs, we’ve been using ETFs in our newsletter recommendations and portfolios for at least two years. Yet, we recently received an e-mail from a long-time subscriber who had just heard a Wall Street analyst talking about the advantages of ETFs over normal mutual funds. The subscriber suggested that we look into ETFs and perhaps begin to use them. He apparently didn’t recognize that he has owned several of them, since we have used only ETFs in our seasonal timing strategy for the last two years, while three of the five short sale positions we recommended in February in expectation of a market decline, are also ETFs.

It is understandable. Exchange-traded funds do have strange sounding names that are not readily recognized as being mutual funds, like iShares, WEBS, and HLDRS. The most popular ETF by far is affectionately known as ‘cube’ or QQQ, since its trading symbol is QQQ. It tracks with the Nasdaq 100 Index. The second most popular is the S&P 500 Depository Trust, which goes under the popular moniker of Spyders (trading symbol SPY).

ETFs have attributes that eliminate most of the negatives associated with normal mutual funds, while adding a number of positives. For instance, they trade throughout the day on the stock exchanges, so are available through any brokerage firm, and have continuous pricing through the day rather than the end-of-day pricing of normal mutual funds. Additionally, there are no front-end or back-end loads, no minimum investment requirements, no minimum holding periods. They even have tax advantages over normal mutual funds for most investors.

However, even though some of them have been around for several years, apparently most investors are still not aware of their existence and usefulness.

The ETF industry is in its infancy, with only 151 funds available so far (up from 60 or so a year ago). But it is a wave of the future, with which investors should become familiar, especially since the old-style mutual funds seem intent on driving individual investors away.

Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.