DarienHacker Wrote: ------------------------------------------------------- > ETFs basically beat index MFs in every way > imaginable: > http://en.wikipedia.org/wiki/Exchange-traded_fund# > ETFs_vs._open-ended_funds > > Even Bogle, who invented MFs, can’t find a way to > beat them, so notice that his firm (Vanguard) > recently jumped on the bandwagon. His sole beef > with ETFs is that some of them aren’t indices A fair point, the MF guys who can’t beat ETF’s are trying to compete with ETF’s by introducing actively traded mutual funds and calling them ETF’s. Hopefully the SEC never allows this sort of foolishness.
i honestly dont’ believe fund managers on average can beat the market. if you think you can find the right fund manager to do this, you might as well say you can find the stocks. lets be honest here, nobody really knows who is the best, and taking any fund manager is in essence a gamble with the odds against you. so why play? i dont’ think the CFA states anything about having the tools to beat the market. Quite the contrary. i remember reading that even though on average fund managers cannot beat the market, a PM still has a role to play in terms of helping investors meet their investment objective through asset allocation. though this is a form of active management, it does not mean going out there and beating a benchmark, more like just meeting it. i don’t even think hedge funds can beat the market after taking into consideration the risk factors and exposure that they have to go through. however, this does not mean they’re not good for a well-diversified portfolio.
bchadwick Wrote: > I suspect ETFs may have larger tracking errors > than index funds, but this would need to be > checked, and for long term investments, it may not > be that important. ETFs are also relatively new > and probably haven’t weathered too many strange > market conditions. I have a feeling that the way > some ETFs are redeemed for a basket of underlying > stocks could expose it to strange liquidity risks. > I’m not sure if MFs have the same issue, but if I > were trying to look for a difference between MF > and ETF risk exposures, I’d investigate further > there. Very good point, tracking error is definetly an issue. And consider what happens when an equity joined a major indice in terms of index buyers.
DarienHacker Wrote: ------------------------------------------------------- > Even Bogle, who invented MFs, can’t find a way to > beat them, so notice that his firm (Vanguard) > recently jumped on the bandwagon. His sole beef > with ETFs is that some of them aren’t indices First mutual fund was Mass Inv Trust back in 1924. I don’t think Bogle was even born prior to that. He started his first fund around 1976 or so. It might have been the first index fund…
FrankArabia Wrote: ------------------------------------------------------- > i honestly dont’ believe fund managers on average > can beat the market. if you think you can find the > right fund manager to do this, you might as well > say you can find the stocks. lets be honest here, > nobody really knows who is the best, and taking > any fund manager is in essence a gamble with the > odds against you. so why play? Well then, I guess it should be a matter of time before the $11 trillion sell off begins. But seriously, there are a lot of worthless funds out there that no one should own. Eliminate them and then re-visit those averages and odds. Then define success. Do you seek an investment that is guaranteed to never trail the S&P in a given year by more than 0.12%? OK, then yes you should index. For most the goal is to outperform a benchmark over a full market cycle. I can think of half a dozen LC managers that have outperformed the S&P over the trailing 3-, 5-, 10-, 15-, & 20-, year time periods. Will they beat it every year going forward, absolutely not, but if your goal is to outperform an index over time with less sd, then there are some managers worthy of consideration.
i get a lot of calls from clients asking me stuff like…“how is my mutual fund doing” and i got about to look up morning star and see hwo they compare to the index. Most lose. don’t know why anybody want to take the risk with a PM. i have also noticed a lot of people switching out of MF and into ETFs. the reason they didn’t do it before was because they simply didn’t understand what ETFs were since nobody at the bank is sitting there saying, “look, on average, your fund manager can’t even beat a passive index, so stick with a ETF”. if people are educated about it, i strongly doubt that mutual funds will be in business much longer.
My dream at night… “everyone” switches into ETF’s and drives MF out of business. I will then be able to step into the space with a “unique” product that exploits all of the arbs and undervalued stocks that no one is reaseaching anymore b/c they buy etf’s. My phenomonal out performance will then make me rich via the2/20 fee structure;) But seriously the market(large caps) is only efficient because so many poeple are lookig for inefficiencies and arb opertunities, take them away and you get an inefficient market which removes the justification for ETF’s…
Frank, I realize that this discussion is over for you. Let me just say this: First, if a lot clients call and they don’t own a single mutual fund that is beating the benchmark then someone needs to give them some useful advice. I mean who is recommending that clients purchase or hold chronic under performers? Second, whenever someone comes to me with the greatest innovation ever created, the one that is certain to out perform… well I just think “new economy”. And third, it is easy to suggest everyone go long index when the market is in a 4-5 year bull run. The S&P had Enron as a component until Dec. 10th 2001. Enron filed for bankruptcy protection on Dec 2nd that year. Unless you can tell us all what the index is going to do next year, there is some value in having a committee of competent managers analyzing portfolio holdings and making rational decisions.
I’m skeptical ETF’s would have larger tracking errors, but would be interested to know if there is evidence to the contrary. What are some of the fees like on more exotic etf’s (the ETF’s that don’t track indices)?
Every ETF has to track an index. The entire point is that you must know the underlying composition of the fund at any given point in order that the Arbitrage trading can work. Otherwise you could end up at a significant premium or discount to NAV, with no mechanism to right it. The index may not be a market cap weighted index, but there must be clearly definable rules behind it. It must be mechanical, and therefore an index.