The first mutual fund appeared on the scene in Boston in the mid-1920s. It offered the public the ability to invest in a diversified portfolio of stocks with a fairly small minimum amount of money and still hire professional management services.
The first mutual fund appeared on the scene in Boston in the mid-1920s. It offered the public the ability to invest in a diversified portfolio of stocks with a fairly small minimum amount of money and still hire professional management services. Now there are more than 30,000 mutual funds. These are technically known as open-end funds because you can buy in or sell out at the end-of-day market price.
More recently exchange traded funds have become all the rage. My Worden Brothers database has 1,329 of these in it at present. They have become popular for several different reasons.
First, during the record bull run of 1995-99, some experts said managed funds were unnecessary because one could not beat the S&P 500 over the long run anyway. An ETF had been created in 1988 called the SPDR (Standard & Poor’s Depositary Receipts) that in one share contained an investment in all 500 of the broad U.S. stock index. Soon another one appeared to track and contain all 100 of the Nasdaq’s largest company stocks.
Because these and hundreds of ETFs issued since then do not involve teams of analysts and managers, they have lower internal administrative expenses. They are bought or sold like a stock, at any time of the trading day instead of being priced only at market close. Instead of the usual fund expense of 1 percent or more per year, the most broad-based cost only one-tenth of 1 percent, and others range up to .70. But like a stock and unlike an open-end fund, in the typical account you pay a trading charge each time you buy or sell one or more shares.
Because of their structure and passive operations, they also can minimize your recognition of gains and losses and be tax efficient during the time you hold the investment. Thus you are able to choose if and when you sell to reap the harvest and pay capital gains taxes (or take a loss, as has been common in the past decade).
Like all American inventions, once an idea catches on, the variations become endless. We want all sizes, shapes and colors, right? So having hundreds more recently created ETFs gives us fantastic choices. I think the most important advantage of these is to be able to choose the sectors within the market that are trending up and can make the most profit for you.
For example, this year through Monday, the SPY (S&P 500 index ETF) has gained 7.64 percent. However, the ProShares Ultra Biotech Nasdaq (symbol BIB) has gained 54.4 percent. The iShares DJ US Homebuilders (ITB) is up by 41.9 percent. Some ETFs are structured so as to generate results that are a multiple of an index’s or sub-index’s performance. Accordingly, the Rydex 2X S&P 500 (RSU) has gained 15.89 through Monday. There are also ETFs that short the market or a part of it such that they go up in value as the regular market falls.
With all of this choice and flexibility, is this a great country or what?
Performance figures obtained from Worden Brothers Inc., TeleChart 2000.