Mutual Funds plus ETFs

You’ve heard of funds of funds, now meet funds of ETFs.

In a special report on fund investing, Funds + ETFs = ?, the Wall Street Journal’s Allison Bisbey Colter examines this new trend.

According to Bisbey, 49 mutual funds have at least 70% of their assets invested in ETFs. The mutual funds that invest in ETFs are mostly target-date retirement funds, which provide one-stop shopping for investors seeking exposure to a variety of asset classes.

However, these new funds come with the same disdadvantages as other mutual funds. Inflexible trading, high expense ratios, large sales commissions and lack of transparency are just some of the reasons why investors are abandoning mutual funds in favor of ETFs.

Bisbey also notes the recent introduction of ETFs of ETFs. For example, InvescoPowerShares launched three ETFs that provide exposure to a variety of asset classes by investing in ETFs from PowerShares and other providers. The ETFs include:

  • Autonomic Balanced Growth NFA Global Asset Portfolio (PAO)
  • Autonomic Balanced NFA Global Asset Portfolio (PCA)
  • Autonomic Growth NFA Global Asset Portfolio (PTO)

TDX Independence Funds and XShares Advisors also offers a family of target date ETFs that invest directly in a variety of securities. Offerings include:

  • TDX Independence 2010 ETF (TDD)
  • TDX Independence 2020 ETF (TDH)
  • TDX Independence 2030 ETF (TDN)
  • TDX Independence 2040 ETF (TDV)
  • TDX Independence In-Target ETF (TDX)

One point in the article was not correct. Bisbey quoted Morningstar’s Scott Burns as saying “If you’re in the accumulation phase of retirement planning, [individual] ETFs aren’t the best product.”

Burns’ observation is a misconception that continues to be pushed by the mutual fund industry. Commission plans as low as $4 per month are available for ETF investors that make it affordable to invest small amounts on a regular basis. Learn more in the article Pros and Cons of ETFs.

Investors who are just beginning to save for retirement or plan for college have several ETFs to choose from. One example is Vanguard’s Total World Stock Index ETF (VT) which invests in 2,900 stocks across 47 countries and carries an expense ratio of only 0.25%.

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