Wednesday, August 02, 2006

Sector Based Mutual Funds getting Hammered

It seems that buying ETFs have replaced investing in Sector Based Mutual funds.

During just May and June, investors poured $2.48 billion into sector ETFs, while sector mutual funds saw net outflows of $3.32 billion, according to fund tracker Lipper. Most interesting, during that two-month period of rising energy costs, funds holding natural-resources stocks saw a net outflow of $25 million, while natural-resources ETFs received $1.83 billion in new assets.

I would rather buy an ETF then a Mutual Fund just because I can trade it faster if oil or gold prices start to drop again. You have more control over portfolio weightings if you stick to ETFs. Plus I like them because you just have to see what sectors seemed poised to do well and not have to drill down and own individual stocks to get that sector exposure. This article touches on why I like ETFs vs. Sector Mutual Funds. I hate those redemption fees.

The redemption fees are a growing issue, particularly when it comes to sector investing. Investors pour money into a given sector quickly, then get out when sentiment shifts. People who want to time the market often have to pay redemption fees for these short-term trades — more so now since the mutual-fund scandals of 2003 shone light on the practice of market timing — which drives up the cost of trading. ETFs don't have such redemption fees, so are better suited for those who want to trade sectors, rather than invest in them over a longer term.

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