Timbals

Thursday, May 15th, 2008

Mutual Fund And Etf Screening

People simply want to invest in mutual funds and exchange traded funds (ETFs) that have higher chances of doing better in the future on both a sustained and risk-adjusted performance basis. With real lives to lead, people who are not professional investors just want an efficient, but effective fund identification process. They want to pick the funds that will make their investment assets work for them rather than having to work for their assets by spending large amounts of time monitoring and repeatedly changing funds.

Millions of individual investors run futile hamster wheel races pursuing the illusion that the superior past performance of funds and individual securities will lead to superior future performance. They need to stop chasing their tails and get on with their real lives. However, it is difficult for anyone to stop running in a personal hamster wheel and get off, unless he or she is convinced of a better alternative that can be self-implemented with relative ease.

The good news is that the scientific finance literature has shown that there really are better approaches to buying and owning funds. You do not need to frantically chase fund performance. Better performance tends to come to those who calm down and more carefully evaluate what tends to work before buying into investment funds.

The following is a list of mutual fund and ETF selection criteria that can help you to break the cycle of frequent fund buying and selling.

1) Choose mutual funds and ETFs with lower investment management expenses

Lower investment management fees are usually better. Lowest is best, and lowest means passively managed index mutual funds and ETFs. Since there are numerous funds with annual expense ratios below .25%, look there first. The higher the annual fund expense ratio, the more you should question why you should pay such high expenses. Paying more tends to lead to inferior rather than superior net performance.

2) Avoid mutual funds and ETFs with higher investment portfolio turnover

Lower portfolio turnover is better. Higher turnover increases hidden fund transactions costs, which tend not to be recouped through better performance. Look for single-digit and very low double-digit annual portfolio turnover rates in the funds you purchase.

3) Avoid mutual funds and ETFs with sales commissions and 12b-1 fees

The great majority of investors buy funds through advisors and pay a very, very high price over their lives for doing so. You simply do not need to pay hefty sales commissions (loads and higher annual expense ratios) to advisors who will only offer to you those funds that will pay them these hefty sales commissions. When you pay the sales commission of someone who will only sell you something that is too expensive, you shoot yourself in both feet.

For more information on asset management please contact Nigel Walter at Connaught Asset Management.

This entry was posted on Thursday, May 15th, 2008 at 10:05 am and is filed under Business Success, Finance Matters, Investing. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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