Posts Tagged ‘no load index funds’

7 Ways to Pick the Best Noload Mutual Funds and ETFs

Scientific Criteria for Selecting Top No Load Mutual Funds and the Best Mutual Funds and ETFs

People simply want to invest in what they hope will be the top and the best noload and exchange traded funds (ETFs). They want selection criteria that can lead to a higher probability of doing better in the future on both a sustained and risk-adjusted investment fund performance basis.

With real lives to lead, people who are not professional investors just want an efficient, but effective fund identification process. They want to pick the best mutual funds and ETFs that will make their investment assets work for them. They do not want to have to “work for” their assets by spending large amounts of time monitoring and repeatedly changing from one mutual fund or exchange-traded fund to another.

Millions of individual investors run futile hamster wheel races pursuing the illusion that the superior past performance of funds and individual securities will lead to superior future performance. The Pasadena Financial Planner has written these articles for those of you who want to stop “chasing your personal finance tail” and get on with your real life. Of course, it is difficult to stop running in a personal hamster wheel, unless you are convinced that there is better approach that you can implement yourself with relative ease. This article and this website should be good news to you, because it provides a better way for you to find the top and the best and ETFs.

Low Cost No Load Index Funds and ETFs Simply are Better

Taken as a whole, the vast body of investment research studies show that there really are better approaches to buying and owning and ETFs. You do not need to frantically chase fund performance. Performance chasing simply does not work.

The vast majority of individuals who chase fund performance get results that are far worse than a passive approach. Better performance tends to come to those individual investors who calm down and try to understand what has actually been demonstrated to work in the investment research literature.

Below we introduce seven articles on selection criteria can lead you to the best and ETFs to hold for the very long term. In particular, note that you should use the first six selection criteria first. Only then should you look more closely at a fund’s past performance — and then only for the purpose of eliminating the worst historical performers. Read these seven articles for all the details!

In addition, if you want to use these 7 selection criteria to find the top and the best noload and ETFs on your own, you need some automated tools. Free ETF and mutual fund screening tools and free mutual fund databases would be a good thing. To find the best and ETFs, of course, you also need access to automated fund screening applications that have accurate and up-to-date data sets. The Pasadena Financial Planner has also written about screening applications that you can use free on the web. Click the Sitemap to find these articles.

The Best Mutual Fund Selection Problem — Solved for Individual Investors

This “Best No Load Mutual Funds” website provides two very key parts of the mutual fund and ETF selection puzzle for individual investors! The 7 scientifically based selection criteria introduced below provide rational fund screening rules.

These 7 screening criteria and the information provided on this website about free online investment fund screening tools can help you to winnow down the tens of thousands of available investment funds. As a result, you can reduce the selection problem down to a much more manageable number of funds for you to evaluate more carefully prior to investing. You do not have to pay high fees to an expensive financial advisor who will tell you to pick expensive funds with better performance that most often will turn out to be mediocre or worse in the long term.

Read the summaries below, and then click on the links for more information about these 7 scientific no load mutual fund and ETF selection criteria.

1) The Best Mutual Funds Have NO Sales Loads and NO 12b-1 Fees

The great majority of investors buy funds through advisors and pay a very, very high price over their lives for doing so. You simply do not need to pay hefty sales commissions (loads and higher annual expense ratios) to financial advisers who will only offer to you those funds that will pay them these hefty sales commissions.

When you pay someone’s sales commission who only tells you about expensive , you shoot yourself in both feet. First, you pay for inferior inferior advice. Second, you end up living with fund expenses that kill a substantial portion of the growth of your personal investment portfolio.

All mutual fund sales commissions and marketing fees can be avoided entirely by buying from the many mutual fund families that will sell fund shares directly to the public without such fees. ETFs will inevitably involve brokerage commissions, so always use discount brokers. Then, do not trade ETFs. Instead, sit tight with a very long-term buy-and-hold strategy to amortize these exchange-traded fund trading costs.

This investment fund selection criterion is very simple. Zero is the maximum amount of front-end load and back-end load fees that you should to pay. Zero is the maximum marketing or 12b-1 fee you should pay. Just say no.

2) The Best No Load Mutual Funds Have VERY LOW Management Expenses

Lower investment management fees are better. Lowest is best, and the lowest means passively managed index and ETFs. Since there are numerous funds with annual expense ratios below .25%, look there first.

The higher the annual fund expense ratio the more you should question why you should pay such higher expenses. Paying more tends to lead to inferior rather than superior performance net of you overall investment costs and capital gains taxes.

3) The Best Noload Mutual Funds Have VERY LOW Portfolio Turnover

Lower portfolio turnover is better. Higher turnover increases hidden fund transactions costs, which tend not to be recouped through better performance. Look for single-digit and very low double-digit annual portfolio turnover rates in the no load and ETFs that you purchase.

4) Avoid Large Actively Managed Mutual Funds

When they trade their overly large portfolio positions, large actively managed funds tend to affect securities market prices negatively. This can only drag down their net fund performance. The more they trade, the worse it tends to get. High trading costs suck value out of the mutual fund portfolio, and these costs are on top of the management fees that you pay directly.

High turnover by large funds should be a big red flag to you. If you avoid actively managed funds altogether, then your concerns about excessive fund size can be greatly reduced. Very large need to manage their trading impact, but their turnover is far lower than actively managed funds.

5) Choose Mature Mutual Funds

The ETF and mutual fund industry throws a whole lot of new fund spaghetti on the wall to see what will stick. IF a new fund has a lucky streak, individual investor assets and “advised” assets come running their way. This is new fund success — at least success for the fund company.

However, when you invest in a very new fund, and it fails to grow, the fund is very likely to die or to be eaten. Rarely do lousy young and ETFs fold and refund money. Why confess incompetence and give back assets that could still yield fees?

When new funds do no attract enough assets, these “failed” funds (and your invested and diminished assets) most often will get merged into other funds. Unfortunately, new failed funds tend to get merged into larger funds with noticeably inferior historical performance.

Fund companies do not want to take any of the luster off the of their currently hot funds. Therefore, your money gets tossed into a bigger dog or just average fund. To avoid participating in this frenetic new fund infanticide process, only pick funds that have been in business for at least a few years.

Three years is probably enough. Mutual funds are like dogs in some respects. They grow up in just a few years. However, if they get caught in traffic at the wrong time on “The Street,” they may get run over or be eaten by a bigger dog.

6) Avoid Very Small Mutual Funds

Small funds cannot operate efficiently. They need a minimum critical mass of assets to fund required management expenses. Simply avoid very small funds. One or two hundred million dollars is probably the minimum. A higher minimum would also be fine, since there are still many larger funds to choose from that would meet these other criteria.

7) Screen Out Inferior Mutual Fund Performance

Evaluate the historical investment performance of and ETFs, but only AFTER using other screening criteria. Superior or average past fund performance tells you ABSOLUTELY NOTHING about how a fund will perform in the future. Pay attention to the fine print in the prospectus that says that past performance does not indicate future performance, because this has been shown to be true.

Ignore all the fund industry’s selective marketing of only their past winners. Individuals need to move beyond their naive and flawed notions about historical investment performance.

Modern, highly competitive, and real-time securities markets are auction price setting mechanisms that force the mass of smart and not-so-smart professional and amateur investors to accept largely average returns over time. Only very poor past performance tends to indicate potentially sub-par performance in the future, and that is probably due to higher costs. Therefore, eliminate only the worst of historical performance during fund screening and choose from the remainder — despite whether a fund has had superior, average, or even somewhat below average performance in the past.

Net of costs, four and five star funds are no better than three star funds and probably no better than even two star funds. Eliminate the bottom one-tenth to one-third of funds on a historical performance basis and choose from the remaining nine-tenths to two-thirds without stressing their past performance. Instead, choose no load with very low costs and turnover.

Passive, low cost, noload index usually have higher risk adjusted performance

If you evaluate the investment research literature, you will find that buying passive, low cost, noload index and ETFs are far more likely to lead to higher risk adjusted investment performance over the long run. You can help to break the cycle of frequent fund buying and selling. You can get off the performance chasing hampster wheel that the securities industry wants you to keep running on for your entire life.

Securities sales people and financial advisors get paid more, when you pay more. That is why they shamelessly tell you that you must “pay more to get better performance.” This is complete rubbish. The investment research literature says the opposite. Pay less and get more.

Push the button — get some cheese. Tell naive investors to pay more — get some expensive cheese and some big bonuses. That is why rats and financial sales people keep hitting their buttons. When rats push the button, they get cheese. When financial salesmen push the button, they get paid very well.

Unfortunately, you end up being the one who pays them. If they really understand the investment research literature — and most securities sales people do not — then they just hope that you will never figure it out. Or, you might not realize the problem until years later, when your personal investment portfolio is much smaller than it could have been.

However, if you have already figured out the problem, then these 7 selection criteria offer you a better solution and a relatively easy way to pick the top and the best and ETFs. Become a proactive and extremely cost-conscious consumer of financial and investment products today!

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Avoid Large Actively Managed Mutual Funds

Big mutual fund portfolio positions and higher percentage ownership of any company’s stocks and bonds are not good for actively managed .

These big positions and high percentages are not good for your personal investment portfolio either. Large size constrains how a fund can trade and how efficiently it can do so. When an actively managed mutual fund becomes very large, it must manage its trading exceptionally well, or it will suffer significantly higher transactions costs, which tend to cause lower net . The need to balance short term securities market trading supply and demand will drive up trading costs for actively managed .

There are some extremely large . For example on January 26, 2007, Morningstar, Inc. data indicated that the total net assets of the largest U.S. domestic ranged from $161.9 billion for the largest mutual fund to: $45.0 billion for the number 10 US mutual fund, $25.1 billion for #20, $19.0 billion for #30, and $14.3 billion for #40.1

Only a few of these very large stock and bond and ETFs were passively managed no load .

The rest were actively managed . All share classes for each fund, including share classes with front end loads and back end loads, were grouped together for these total asset numbers. While exchange traded funds (ETFs) are a much newer investment vehicle than , their characteristics are more similar than different.

In general, individual investors can use and ETFs interchangeably, if they follow the “7 Ways to Pick the Best Noload Mutual Funds and ETFs” The largest U.S. diversified domestic ETF held $85.1 billion and the 10th largest exchange-traded fund held $10.9 billion.2

Keep in mind that the large investment portfolio size issues and the market impact issues discussed in this article are much more significant concerns for actively managed . They are not as important for and for ETFs that track passively managed market indexes. This is simply because very large do far less trading.

Because of how ETFs are constructed, the ETFs that have been introduced thus far for purchase by individual investors tend to be indexed and therefore more similar to passively managed . Unfortunately, the vast majority of ETFs on the market now track relatively narrow sector index benchmarks. This leaves undesirable industry sector volatility in your portfolio, when compared to broader based market indexes that diversify across all market segments.

The composition of an ETF’s portfolio is transparent and known to the market on a daily basis. Portfolios of actively managed are only known publicly a few times a year. Therefore, mutual fund portfolio composition becomes public long after trading changes have been made.

Given this exposure of an active ETF’s trading strategy almost in real time, there is concern that other traders in the market might front run an actively managed ETF. This has slowed the introduction of actively managed ETFs, although some are coming to market. Nevertheless, there already are some ETFs that do reconstitute their portfolios periodically and these ETFs can be viewed as quasi-actively-managed.

With no load , the target composition of their portfolios can be known through the benchmark index.

The composition of a particular no load index fund may vary from the index, but usually only by a small amount. The target portfolio composition changes only when the publisher of the underlying bond or stock market index changes the composition of the index. When the index changes, then must make changes, and this can have a market trading impact. Adverse market impact raises transaction costs and lowers net mutual fund or ETF performance.

Is there a maximum stock and bond mutual fund size of actively managed that might affect investors’ welfare negatively?

A larger fund can afford more analysts and can increase the number of different company securities that it holds. However, there are practical limits. The size of the positions held will also tend to increase. Very large size can push some funds into investing only in companies with very large market capitalizations.

Many of these very large funds become defacto , because their holdings tend to replicate a large portion of the benchmark securities index, while they charge higher fees and more often deliver inferior net performance after their added investment expenses and costs.

With so much money to invest, it is not practical for these fund giants to track companies with smaller equity market capitalizations or debt issues. Many giant have enough assets to buy smaller companies in their entirety.

However, all diversified investment funds are constrained from doing so by laws and regulations — even if they wanted to so. For example, funds must avoid certain concentrated positions (e.g. not holding more than 5% of a company’s securities) that would jeopardize their legal standing as diversified management companies and their corporate tax exemptions at the fund management company level.

Even if they stay within these legal ownership limits, very large actively managed fund size inevitably increases the fund’s percentage ownership of the securities that it holds. A notable issue faced by very large and by large actively managed is the “market impact” of the fund’s trading activities.

If the fund tries to buy or sell large positions in individual firms over short periods, the fund can adversely affect the market price of that security temporarily. When large funds buy or sell, there must be sufficient trading volume on the other side. A sufficient volume of trades by others with contrary opinions of a company’s prospects must be available. If not, the market bid/ask price range must adjust temporarily to encourage others to enter the securities markets to trade.

Trading induced changes in securities prices can significantly drag down the net investment performance of very large actively managed .

In addition, mid-sized can also suffer adverse market impact. If the positions traded by mid-sized funds are substantial relative to the total available short-term trading volume, they will also suffer negative market impact. Nevertheless, this market impact problem tends to be the more acute with larger funds.

Given these considerations about the size of very large actively managed , you might wish to limit the maximum size of the actively-managed mutual fund or quasi-actively-managed ETF, in which you would be willing to invest. You might decide that you are not willing to put your money into funds that exceed perhaps $10 billion or $5 billion in assets or even less. There is no magic excess size threshold. Nevertheless, you should be aware that you can still choose from numerous funds with assets under $10 billion or $5 billion that still meet the other screening criteria from the “7 Ways to Pick the Best Noload Mutual Funds and ETFs.”

Many monster-sized actively managed receive heavy publicity.

You should keep in mind that your familiarity with the brand name of a mutual fund or with the names of mutual fund companies does not mean a larger fund is “better” than a smaller one whose name you may not recognize. In fact, because of the problem that investment portfolio performance could be worse for large and very large actively managed , well known brand names might deliver worse performance over the long term.

If well recognized actively managed mutual fund brand names attract excessive asset inflows, this will cause higher trading costs, greater “market impact,” and other investment management problems. In addition, the portion of their portfolios held in cash can increase, and you will get charged the same high management expense ratio for the cash, as well as, the stock and bond holdings.

Familiarity or lack of familiarity with a mutual fund brand name should not be considered when you screen funds initially. Brand awareness often is simply an indicator of a fund family’s higher marketing and advertising costs that fund shareholders tend to pay one way or another. If other screening criteria indicate that a fund could be attractive, the fact that it is an unfamiliar fund should have absolutely no bearing on whether you decide to do more investigation of an unfamiliar mutual fund — preferably a no load index fund.

Understand that large mutual fund portfolio size is a far, far greater concern for actively managed managed funds than for passively managed and ETFs that track bond and stock market indexes.

Very large passively managed do far less trading, because they trade only to invest net inflows or to redeem net outflows. In contrast, large actively managed funds incur much higher trading costs in pursuit of better returns, which raises the hurdle than they must get over just to break even on these attempts.

With an actively managed mutual fund, for example, the mutual fund manager or managers can simply decide to change the composition of the investment portfolio and incur the trading cost and market impact. Every mutual fund manager hopes to gain more than the incremental trading costs, when they do this.

Of course, when all these collective buy and sell decisions are made, fund managers are more likely to be wrong than right. They have no crystal balls about what will happen to securities market values in the future. For every securities buyer there must be a seller and for every securities seller there must be a buyer. Actively managed mutual fund portfolios get rearranged, trading costs go up, and total net performance must come down.

If you are considering investing in a very large actively managed mutual fund, you should think about the alternative of investing in a noload mutual fund that targets the same index benchmark.

No load do significantly less trading through their buy-and-hold strategies. They have a lower likelihood of a performance shortfall due to their market trading impact. Of course, index fund expenses should be substantially lower, which is also much more likely to improve net investment performance.

As mentioned above, when an actively managed mutual fund’s size grows very large, its portfolio holdings may also move closer to the composition of the market index. There is strong evidence that the portfolios of most very large, large, and even medium sized actively managed closely resemble the composition of the passive indexes against which their performance is benchmarked.

However, the annual percentage expense ratios of these actively managed funds are far higher than the annual percentage fees of passively managed . Active mutual fund shareholders are charged much higher annual management expense ratios across both the active and passive portions of their portfolios.

In effect, you pay an extremely high asset management fee for just a little active management. This is because you pay a higher management expense ratio across all fund assets, but only a much smaller portion of the investment portfolio is really being managed actively.

Of course, portfolio managers might disagree. Nevertheless, how do they explain the most likely outcome, which is to relatively closely track, but usually under perform the benchmarket? Whatever the reasons or excuses, you can decide if you want to keep paying high fees for closet indexers who under perform.

More often than not individual investors lose, when they hold actively managed . The longer the time period is that investors hold actively managed , then the smaller and smaller the chance is that they will actually “beat the market.” Sadly, this transfer of assets from individual investors to mutual fund companies has continued and has grown for decades. It is well past time for individual investors to wise up!

1) This is’s free mutual fund screener. Check the Sitemap for our articles about free online fund screening applications and databases.

2) This is’s free exchange traded fund screener. Check the Sitemap for our articles about free online fund screening applications and databases.

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