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Exchange traded funds (ETFs) remain one of the fastest growing areas of the mutual fund industry. The number of ETFs to choose from and the dollars invested in them has mushroomed. In 1999, there were just 30 ETFs, primarily targeting the broad U.S. stock market indexes. Ten year later, there were nearly 800 ETFs, targeting ever more narrow segments of both stock and bond markets around the globe.
The idea of passively managed portfolios tracking an index isn’t new. At DAL Investment Company, advisor to the FundX Upgrader Funds, we’ve invested in index funds since 1976. As ETFs proliferated and covered more areas of the market, we integrated ETFs seamlessly into our system, right alongside actively managed funds. We believe that an expanded universe to choose from can provide the best opportunities so long as we have a disciplined and proven selection process. We combine ETFs and actively managed funds, classified by risk, in order rank and sort all funds by current performance. At times, many of the top performing funds are ETFs, and at other times, actively managed funds have better returns.
There’s certainly a lot to like about exchange traded funds. ETFs trade throughout the day like stocks and don’t require minimum hold times like many regular mutual funds. ETFs also usually have lower expenses than regular mutual funds providing a relatively low cost way to get exposure to most markets, sectors and regions. Although it’s important to remember that, at the end of the day, the best judge of any investment is the net (after fees and expenses) total return.
There are trading costs involved in buying and selling ETFs, and, because a fee is charged for each trade, these are proportionately greater for smaller purchases. If you trade ETFs fairly actively or hold a large number of small positions, you could wind up paying more than you’d expect.
A potential hidden cost comes in the form of the bid-ask spread. The bid-ask spread is the difference in the lowest price a seller is willing to accept and the highest price a buyer is willing to pay, and this spread can be wide.
Trading volume (the number of shares bought and sold that day) is an important factor to consider when trading ETFs. Volume varies widely among ETFs and can affect an investor’s ability to get a fair price.
These potential trading issues are one reason many investors turn to managed portfolios of ETFs such as the FundX ETF Upgrader Funds (REMIX and UNBOX).
Professionally Managed Portfolios of Funds and ETFs
Most Most of the FundX Upgrader Funds invest in both ETFs and regular mutual funds, but two of the funds invest exclusively in ETFs: the FundX ETF Upgrader Fund (REMIX) and the FundX ETF Aggressive Upgrader Fund (UNBOX) offer investors the ability to own a professionally managed portfolio of ETFs. Our full-time traders are dedicated to best execution once our strategy determines which are the highest ranking funds in the current market environment.