While the argument rages on over which investment vehicle is better - mutual funds or exchange-traded funds - some money managers are finding that the best results may come from a mixture of both.
According to Murray Coleman of Investor's Business Daily, "using ETFs and open-end mutual funds results in better performance than sticking solely to either type of investment vehicle, some money managers have found."
More and more managers, Coleman says, are using ETFs in lieu of index funds. But for other markets, actively managed funds are the buyer's choice.
"Why? Since they're often based on indexes, ETF turnover is light," he says. "That means if you've bought an ETF with a large percentage of its assets in one or two stocks, you could be locked into a laggard if those stocks underperform the market."
Coleman cites Jason Browne, portfolio manager at DAL Investments, who manages $1.5 billion in assets. "We don't have any trading restrictions with our investment strategy," said Browne. "All things being equal, we like ETFs to help us maximize our freedom and focus on performance."
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Coleman says that DAL Investments looks at funds on a case-by-case basis, making decisions dictated by needs and the strengths that funds can potentially bring to the table.
Add in managers' performance in declining markets and weighting factors, and DAL has the ingredients it needs to rank funds on a one-, three-, six- and 12-month trailing-return basis.
"It's not an issue whether ETFs are better," said Browne. "Our back testing of different portfolios over time shows that mixing the two produce better results than using one over the other."
As a result, ETFs have replaced traditional index mutual funds in DAL's portfolios.
"ETFs are indexed funds with lower costs and more flexibility since they can be traded throughout the day," said Browne.
Other managers say they can get a better price break on ETFs (compared to mutual funds) but can't get the performance of actively managed funds.
Hence the move to hybrid strategies - a trend that Coleman says will grow in 2006 and 2007.
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