ETFs highlight trends in mutual fund investing

Physician's Money Digest, April 2007, Volume 14, Issue 4

One of the biggest stories related tomutual fund investing is the explosion of acousin to the mutual fund, the exchangetradedfund (ETF). Kenneth E. Prather, Jr.,CPA, CFP, and owner of Prather InvestmentManagement, says a mutual fundmay impose a 2% redemption fee forfunds sold within 90 days of purchase. Inaddition, the brokerage firm where theinvestor is purchasing the mutual fundmay impose their own short-term tradingpenalty. ETFs do not carry thesepotential costs.

"A key trend is the large variety of investmentchoices available now throughmutual funds and ETFs," Prather says."The imagination is running wild in themutual fund industry. Investors can usemutual funds or ETFs to invest in specifictrends such as alternative fuel or specificcountries around the world.Investors can access investment strategiessuch as leverage or shorting stocks.Of course, many of these strategies canburn investors badly unless they are verycareful about their investment choice."

Another trend Prather says he's seeingis the added flexibility being given tomutual fund managers. Managers arebeing allowed by their company brass tomove beyond a specific investment styleboxpigeonhole to generate return.

"It is very common for a mutual fundmanager to be assigned a specific stylebox such as domestic large cap value. Itsshareholders and the world are told thatthis fund is a large cap value fund and itwill invest primarily in this style box,"Prather says. "This can be very limitingduring periods when large cap value doesnot do well. What's happening now is achange where mutual fund managers areable to adopt a ‘go-anywhere'strategy. Forthe large cap value fund manager, this maymean he can invest in some growth, small,and mid cap stocks."