Fewer mutual funds and more ETFs mean better options for investors

The number of mutual funds available to investors will contract in 2009. It will be the first time that there has been such a contraction since the carnage of the market after the internet bubble burst in 2002. At the same time, the market for ETFs is rapidly expanding due, in part, to lower management costs than many mutual funds offer and because ETFs have the flexibility to be traded throughout the day.

So far a total of 396 funds bit the dust in 2009, compared to 438 in all of 2008. But the big difference between the two years is that only 156 new funds have been launched so far in 2009, while 487 funds were launched in 2008.

For investors, fewer mutual funds is not necessarily a bad thing. Funds that close are bad performers and if they are no longer available, that means better options for investors.

I just had a call from a friend in panic who didn't know what to do because two of the funds in her 401(k) were disappearing. I calmed her down and told her that this was a good thing. Her company had a bad selection of funds from which to choose originally. Now that the poor performers closed, the company wised up and picked some larger, better performing mutual fund groups for its 401(k). I was able to guide her to replacement funds from much stronger companies -- Vanguard and American Funds --two of my favorite fund groups because they offer some of the lowest management fees in the the mutual fund business.

Companies decide to close bad performers because the performance of the mutual fund company will ultimately look better without the taint of the poor performing funds. If one of your funds are closing, your money will likely be moved to another fund in the same mutual fund company. Don't just accept the alternative. Get to know the prospectus of the new fund and make sure it still meets your long-term goals. For example, you may have selected the fund because it invests in small-cap funds and the new fund your money is moved to may focus on medium or large-cap companies. Also, while you doing your research, fund out if other funds, either in the same mutual fund group or in another mutual fund group, better meet your performance expectations and goals.

In 2002 after the internet bubble burst, most of the funds that died were growth or technology funds. The funds killed in 2009 have been more diverse. Both bond funds and stock funds lost out. On the conservative side of investing, 39 municipal-bond funds, 11 intermediate-bond funds, 10 conservative-allocation funds and 11 foreign large-blend funds were closed. The large cap categories were the biggest losers with 29 large-value funds, 38 large-blend funds and 36 large-growth funds eliminated.

But while all these funds were closed, companies continue to open the doors for new ETFs and the added competition is making investing cheaper for all. Vanguard has been one of the most aggressive in adding new ETFs and just filed for seven new bond funds with the SEC. Vanguard charges just 0.15 percent in management fees for all these new funds. That's in direct competition for iShares, another major player in the market, which currently charges 0.15 percent for U.S.-backed Treasuries, 0.20 percent for corporate bonds, and 0.25 percent for mortgage backed securities.

As a trader or investor you need to decide which works for best for you. Traders will probably want to choose ETFs because they can trade in and out of a holding throughout the day. But investors who put in a set amount on a weekly or monthly basis would likely find mutual funds the better choice. That's because as long as they've chosen a no-load mutual fund they won't have to pay commissions each time they make an additional investment. Both investors and traders should always look to minimize their initial investment and long-term fund management costs because that can be the biggest drag on their long-term gains.

Lita Epstein has written more than 25 books including Trading for Dummies and The Complete Idiot's Guide to Value Investing.

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