For every reader inquiry about mutual funds I get these days, there are probably 50 others about exchange-traded funds.
That’s why this recent mutual fund-related query from a reader jumped out at me: “I look forward to your upcoming annual Buyer’s Guide to ETFs series,” he wrote. “It’s possible that you’ve addressed this issue in a column not too far back, but is there still any role for mutual funds in a portfolio? If so, under what circumstances?”
The short answer to this question: For sure. Mutual funds can work for people who want a simple, accessible vehicle for making contributions to their investments on a regular basis with no commissions or fees. Funds also offer access to smart managers and strategies that complement other types of investments, including index-tracking ETFs.
The drawback of mutual funds is the prevalence of high fees that undermine returns. There is value in fundland, but you have to put some work into finding it. Start with low-fee fund companies like Beutel Goodman, Leith Wheeler, Mawer and Steadyhand. Each serves the do-it-yourself investor and offers fees that are lower than funds sold by advisers. A balanced, equity or dividend fund from these companies could provide a solid foundation for a portfolio that adds exposure to other sectors or themes via ETFs or individual stocks and bonds.
Funds from traditional fund companies that work through adviser networks or bank branches cost more, which means they have a higher hurdle to get over in delivering returns that compare well with ETFs.
Look for mutual funds that attack the market in a different way than ETFs. Avoid “closet index funds,” which are actively managed mutual funds with high fees and portfolios that resemble the indexes tracked by ultra-low-cost ETFs.
When selecting a mutual fund, the DIY investor should insist on a Series D version. Series D, widely available from online brokers, offers a reduced management expense ratio compared with the usual Series A or B version meant to be sold by advisers.
Total investments in ETFs are about one-seventh the amount held in mutual funds, but it’s ETFs that keep popping up as a topic in my inbound e-mails. Let’s not count mutual funds out, though. Amid the dross, there are some mutual fund industry nuggets.
Note: The first installment of the 2021 Globe and Mail ETF Buyer’s Guide will appear Feb. 12 and the five subsequent segments will run every two weeks after that. Here’s the 2020 version.
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