DIY Portfolio Management

Exchange Traded Funds (ETFs) are growing. Investors are choosing low annual expense and market return over high annual expense and promised performance.

Total ETF inflow is growing faster than Mutual Fund inflow. ETF inflow grew from $42.5 billion in 2000 to $54.4 billion in 2004. In contrast, mutual fund inflow fell from $309.4 billion in 2000 to $180.3 billion in 2004. Standard & Poors Depositary Receipts Trust (SPY) is the largest and oldest ETF. From the one fund SPY started in 1993 the number of ETFs has grown to 150 in 2004.

Growth of ETFs is fueled by investors searching for market performance. About 20% of conventional mutual funds do beat the market. The puzzle is which funds will win, in the future. ETFs, on the other hand, have a reasonably good record of matching the performance of their underlying index. For instance, in 2004, SPY value grew 10.92% and the value of the underlying S&P 500 index grew at 10.88%. The promise of the conventional mutual fund is that it will deliver superior results. The promise of the ETF is that it will match the performance of its underlying index.

Expense for ETFs is less than for conventional mutual funds. A prime reason for the mutual funds' higher expense is that pros perceived capable of superior results are more expensive than technicians paid to duplicate the holdings of an index. ETFs are passive investments and don't require the active management of pros. Investors moving money from mutual funds to ETFs are trading promised performance and high expense for market returns and low annual expense. ETFs generally have expense ratios below 1. SPY's expense ratio is .12. Expense ratio is percent of assets consumed by fees annually.

Investors sticking with mutual funds have a couple of things going for them. Eliot Spitzer has used his New York State Office of Attorney General to scare/shame mutual funds into minding fiduciary duties to their investors. The growth of ETFs is pressuring mutual funds to reduce their expenses and to introduce ETFs mimicking mutual funds. Investors sticking with mutual funds might benefit from the growth of ETFs. However, mutual funds might have a hard time delivering. Slowing growth or actual decline in fund size will make it difficult to reduce their expenses enough to keep investors happy. The more investors defect the fewer left to share the expense.

ETFs trade like stock equities. They can be bought and sold whenever the market is open. They can be shorted, purchased on margin, and optioned. Most brokers charge a commission for every buy and sell transaction. This can be a problem for small investors building a portfolio with monthly contributions. There is at least one broker that charges an annual fee rather than per trade commissions.

ETFs are passive. They only trade when changes are made to the composition of the underlying index. Fewer trades mean less tax consequence. Mutual funds often have taxable capital gains, sometimes even in years when the fund has declined in value (sell winners and hold losers).

That 20% of mutual funds beat the market is a premise. It assumes multiply years and a market defined as the S&P 500. Meg Richards writing for The Associated Press reported that for 2004:

- The S&P500 bested 61.6% of actively managed large-cap funds.

- The S&P400 bested 61.8% of actively managed mid-cap funds.

- The S&P600 bested 85% of actively managed small-cap funds.

The probability of a mutual fund having beaten the market in 2004 is low. Of course, relative performance changes from year to year. Relative performance, of active versus passive management, changes. Relative performance, of individual actively managed funds, changes.

The best ETFs strategy for small, beginning, busy investors is to 'buy and hold' SPY. If you are bigger, experienced, or have time on your hands you can try a more active strategy. A strategy that beat the S&P500 over the last three years is to hold equal amounts of five large diversified ETFs and rebalance weekly. This strategy is in some ways just an expansion of our definition of 'the market' beyond the S&P500. This strategy since inception 3 years ago has beaten the S&P500 just over 1% annualized. This small gain means rebalancing weekly is only viable when it is without trading cost. A more aggressive strategy is to monitor 50 ETFs and hold the most oversold, rebalancing weekly. This strategy since inception 2/27/04 has beat the S&P500 by 16%.

Remember. ETFs' popularity is on the rise. They trade like stocks. They have lower annual expense than mutual funds. Their objective is to mimic the performance of an index. They don't beat or lose to the market, they are the market. It is usually best for low maintenance, 'buy and hold' investors to define the market as broadly as possible.

Lyle Wilkinson, investor, trader, author, MBA Helps individuals learn to self direct their stock portfolios. Book, e-book, PowerPoint "DIY Portfolio Management" http://www.diyportfoliomanagement.com http://www.diyportfoliomanagement.com

shuttle to Midway Beardstown .. Lockport Chicago limo O’Hare

In The News:

The FBI has issued a warning that scammers are impersonating doctors, police and banks using spoofed numbers as "smishing" texts surge nationwide.

Communities with unreliable internet service stand to gain after Amazon's Project Kuiper launched its first full batch of satellites into orbit April 28.

Tech expert Kurt “CyberGuy" Knutsson says unsubscribing from spam might actually backfire. Learn when to avoid it and stop junk effectively.

Tech expert Kurt “CyberGuy" Knutsson talks about how the first nonstop beating heart transplant, called zero ischemic time, at Taiwan hospital changes surgery.

Kurt “CyberGuy" Knutsson: FBI warns of "time-traveling" hackers.

Kurt “CyberGuy" Knutsson talks about a soft, vine-like robot called SPROUT that aids safe survivor rescues in collapsed buildings.

Health insurance giant Blue Shield of California confirmed it had been sharing private health data of 4.7 million users with Google for three years without even realizing it.

Delta and JetZero’s blended wing body aircraft marks a meaningful step toward a cleaner, quieter and more efficient future for air travel.

Recent reports show many common passwords can be cracked in literally seconds. Kurt the CyberGuy explains how to strengthen your passwords.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Iron, a robot that stands 5 feet, 8 inches tall and weighs 154 pounds, combines advanced artificial intelligence with human-like movement and exceptional vision.

Hertz, the rental car giant, recently confirmed that customer information was exposed through a cyberattack on one of its software vendors.

There are a number of features with AirPods you may or may not know about to take your listening experience to the next level. Kurt the CyberGuy explains.

These 35 Chrome extensions have privacy and security concerns. Tech expert Kurt “CyberGuy" Knutsson says to delete them now.

Tech expert Kurt “CyberGuy" Knutsson says 329,000 mph fusion rocket promises to be fast, disruptive and enable deep-space missions.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Tech expert Kurt “CyberGuy" Knutsson says a new autonomous AI is a game changer that also raises privacy risks. Is your data safe?

Tech expert Kurt “CyberGuy" Knutsson says robots and drones are revolutionizing fruit farming with faster picking and smarter handling.

Landmark Admin revises May 2024 cyberattack scope to show twice as many people were affected. Kurt “CyberGuy" Knutsson gives tips to help stay safe from an insurance data breach.

Tech expert Kurt “CyberGuy" Knutsson talks about how Yamaha’s hydrogen outboard motor could revolutionize boating with zero emissions.

Tech expert Kurt “CyberGuy" Knutsson reveals how to memorialize or remove a deceased loved one’s Facebook account and protect their digital legacy from misuse or scams.

Tech expert Kurt “CyberGuy" Knutsson says an Apple Watch saved psychiatrist Amanda Faulkner by detecting deadly leukemia early.

Scammers and fraudsters are increasingly targeting the most vulnerable, especially nursing homes and the personal data of their residents. Kurt the CyberGuy has safety tips.

Infected USB flash drives can spread malware among multiple organizations in ways that can easily bypass traditional security systems.

With a fully automated warehouse system and AI-powered robots, Ocado's Hive picks, packs and delivers grocery store orders in just a few minutes.

DIY Portfolio Management

Stocks & Mutual Fund