No Load Mutual Funds or Exchange
Traded Funds (ETFs)?
by Ulli G. Niemann
If you are fed up with early redemption
charges and ever increasing mutual fund management
fees on top of bad-performing fund managers, read
on. There is a quiet revolution going on in the no-load
mutual fund industry and you, the individual investor,
may benefit from it greatly.
I am referring to Exchange Traded Funds
(ETFs), which have been around for years, but have
grown tremendously since their inception. There are
currently over 100 choices with around $10 billion
In a nutshell, an ETF is a specific
kind of no-load mutual fund that you might consider
to be a basket of stocks. ETFs are diversified like
mutual funds, only they trade like stocks. They are
cheap to trade (as low as $8.00) and donít hit you
with any short-term redemption fees. And they offer
investing opportunities across the board.
ETFs track every index under the sun
including the S&P 500, the Nasdaq 100, The Russell
2000 and many others. Available through any discount
broker, they basically fall into one of three categories:
broad-based U.S. indexes, sectors and international.
The have esoteric names such as iShares,
StreetTracks, HOLDRs and SPYDRs. The difference is
in the index they are tracking and the company marketing
them. You will see big name companies offering them,
like the American Stock Exchange, Barclayís Global
Investors, Vanguard, and State Street Global Investors.
In my newsletter I track the currently
most appropriate ETFs for you to consider. For more
detailed information you can visit these web sites:
In addition to inexpensive trades and
no short-term redemption fees, how else can ETFs save
you money vs. no load mutual funds? One way is on
their annual management fees. That fee for ETFs is
in the area of 0.45% vs. 1.5% on average for no load
mutual funds. The fees charged by discount broker
are so low they almost can be disregarded, usually
less than 0.1% of the transaction.
For example, I have used ETFs for some
managed account clients during my last Buy cycle,
which started on 4/29/03, and paid $27 for a $28,000
order ó and that wasn't even with the cheapest discount
So, if these ETFs are so great, why
hasnít your broker or financial planner recommended
them to you? Simple! Brokers, and those advisors working
on commissions, donít make money on ETFs; no commissions
up front or hidden on the back end. It's simply not
in their interest to promote them.
With all the positives for the investor,
there is one disadvantage, which may not be applicable
to you unless you are a hot shot no load mutual fund
picker. It is that in any given economic environment
really super performing mutual funds can outperform
the indexes, but an ETF can never outperform the index
itís tied to. You would need to look at your own investment
record to know whether this is a downside for you.
Hereís a real life example from my advisory
practice. My trend tracking indicator signaled a Buy
on 4/29/03. Based on my momentum indicators I chose
5 no load mutual funds and 4 ETFs. Over the following
3 months my ETFs gained anywhere from +10.02% to +22.36%,
while my no load mutual funds gained from +9.15% to
+36.35%. If youíre fortunate enough to make a superior
selection you will outperform an ETF. Of course, that
presumes you picked a very successful fund as compared
to only a moderately successful ETF.
A word of caution! Just because ETFs
are cheap and easy to buy doesnít mean they will guarantee
you a profit. You can lose money with them just as
easily as you do with no-load mutual funds. You still
need to make sure you have a disciplined methodology
in place to help you get into and out of the market.
If you donít, youíre gambling no matter what you invest
Having gotten the disclaimer out of
the way, hopefully these insights into ETFs will broaden
your perspective on ways you can prosper in your investments.
© Ulli G. Niemann
About the author:
Ulli Niemann is an investment advisor and has written
about methodical approaches to investing for over
10 years. He avoided the bear market of 2000 and has
helped countless people make better investment decisions.
Subscribe to his free newsletter: www.successful-investment.com