Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > ETFs

Mutual Funds or ETFs? Or Both?

Your article was successfully shared with the contacts you provided.

I, like many of you, enjoy the money management aspects of this business. This week I took a fresh look at the categories in which I invest and the vehicles I use with a focus on mutual funds and ETFs. One of the primary questions I had was, “Should I use mutual funds, ETFs, or some combination of both?” The answer, I found, greatly depends on the category.

Before we go there, I should mention that the result is also influenced by the sheer fact that the ETF world is still in its infancy. In fact, according to Morningstar, there are a total of 975 U.S.-traded ETFs and according to the Investment Company Institute, there are 7,000 mutual funds. Therefore, it stands to reason that, the better choices, at least for now, would reside with mutual funds. To avoid confusion, I am speaking in generalities as there are obviously some ETFs which do better than some mutual funds.

In my analysis, I began by selecting what I consider to be the best mutual funds in each category using my fiduciary scorecard and compared them to the ETF world. If I found an ETF which I thought was better than my fund, then I chose the ETF.

With many of the stock categories, I found mutual funds offered the better alternatives. Of course, if you want to buy an index fund, an ETF is a good option. With bonds, I like some of the municipal ETFs such as SHM and SMB. For the rest, it’s hard to beat bond shops such as PIMCO, Vanguard, and a few others. That leaves alternative investments. Mutual funds seem to offer better options in the following categories: Long-short, hedge funds, and possibly real estate (I haven’t finished looking at real estate). With commodities such as precious metals, industrial metals, and energy, ETFs have some great options.

When looking at the long-short category in Morningstar’s mutual fund universe, be careful. I found this to be a real “catch-all” for several different strategies. For example, the Absolute Strategies fund is a hedge fund of funds, but is included in the long-short category. Sure, part of the fund is long-short, but much of it is not. Moreover, there are a couple of funds that will buy the stock of the company being acquired and may occasionally short the stock of the acquiring company. Another fund sells call options to cover their short side so they never actually short any stocks, yet they were included in this category. Not to cast any aspersions on Morningstar, but like the early 2000s when there weren’t enough TIPS funds to create a separate category; they too were lumped into another category.

The bottom line is that you need to become familiar with the specific strategies of alternative investments to be sure you’re getting what you are seeking. Oh, about correlations, some alternatives are highly correlated with the stock market and some are not, so check this as well. You may not be getting the portfolio risk reduction you are seeking.

Thanks for reading!


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.