ETF Prime Archive
Do You Have a Master Investment Plan in Place?
Listen to The ETF Store Show every Saturday at 4pm on KCMO Talk Radio 710AM as we cover everything you need to know about Exchange Traded Funds and the world of investing.
On our most recent radio broadcast, we explained why you should consider consolidating all of your investment accounts under one roof if you have accounts with multiple firms or advisors. While this strategy can make sense in some cases, particularly for high net worth investors, it can be a huge detriment for the majority of people. Chief among the many concerns of this approach is a lack of an overall investment plan. It can be extremely difficult to have a well-rounded, properly diversified portfolio if you have too many cooks in the kitchen. And this is to say nothing of the various fees, mess of statements, multiple account logins, and various calls from advisors that come with this “strategy”.
If you’re someone who has investment accounts scattered across town, it’s time to round them up and put a real investment plan in place. We explained how The ETF Store can help you do this by combining your investments under a single custodian (such as Charles Schwab) and implementing a customized investment strategy across all of your accounts, potentially with much lower costs (and fewer headaches) than you currently have. Listen to the full show here to learn more about why you should consider consolidating your investment accounts with one firm and how this could make tracking your investments so much easier.
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Do You Have a Master Investment Plan in Place?
Podcast: Play in new window | Download
The Mutual Fund Way – Pay a Lot, Get a Little
If you’ve been following our commentary, whether through our blog or on our radio show, you know that a favorite subject of ours is the underperformance of actively managed mutual funds. In case you missed it, approximately 84% of actively managed US equity mutual funds underperformed their relative S&P benchmark in 2011. That’s right – 84%! Over the past three and five years, 56% and 61%, respectively, of actively managed US equity mutual funds have underperformed their benchmark. Here’s a full chart of the carnage from SPIVA:
But wait, it gets worse. Not only do investors get this severe underperformance with actively managed mutual funds, but they also get to overpay for this gross underperformance. A recent article from smartmoney.com provided an excellent graphic depicting this. The below chart from the article shows the money that five of the largest mutual funds out there is raking in from investors and more importantly, how these funds are performing (or not) relative to their competition:
How ETFs Can Make Tax Day More Pleasant
Listen to The ETF Store Show every Saturday at 4pm on KCMO Talk Radio 710AM as we cover everything you need to know about Exchange Traded Funds and the world of investing.
On our most recent radio broadcast, with tax day 2012 looming, we explained how ETFs can reduce your tax bill. Because of their legal structure and minimal trading, ETFs typically distribute very little, if any, capital gains to investors. In contrast, many mutual funds distribute capital gains – sometimes even if the mutual fund is down for the year!
So, why is this case? Take the following example: Let’s say there’s a mutual fund shareholder that wants to sell their mutual fund shares because they need cash to buy a house. The mutual fund manager may need to sell shares of stocks held by the fund to raise cash to meet this shareholder redemption request. When the mutual fund manager sells shares of stocks owned by the fund for a gain, the mutual fund is required to distribute those gains to all mutual fund shareholders. So to recap, if you’re a shareholder of the mutual fund and another shareholder redeems their mutual fund shares, you may be penalized with a taxable capital gain distribution even though you didn’t do anything. That hardly seems fair. And what’s worse, these capital gain distributions are “phantom gains” in that the share price of a mutual fund is reduced by the amount of the capital gain distribution. So net-net, shareholders haven’t gained anything other than a tax bill.
Contrast that with ETFs where a shareholder wanting to raise cash can simply sell their shares on the stock exchange with no impact to you. There are instances where ETFs may reconstitute or rebalance holdings, thus generating a capital gain distribution, but those instances are rare. Recent data from Morningstar on capital gain distributions showed that over the last five years, looking at the large blend fund category, active mutual funds paid out capital gain distributions equal to 1.92% of the fund value while ETFs paid out 0%. That’s a big difference come tax time.
We also discussed tax loss harvesting strategies with ETFs and talked about some portfolio construction considerations when using exchange traded products. Listen to the full show here to learn more about reducing your taxes by using ETFs.
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