 | Custom Search |
◄ Share or bookmark this page on several major sites.
Home | Archives | Blog | Bonds | Credit & Debt | Forex | Futures | Insurance | Mutual Funds | Options | Real Estate | Stocks | Taxes | Other Investment Topics | New Money Articles
Antti Petajisto and Martijn Cremers from the Yale School of Management have quantified how much a mutual fund really mirrors an index by comparing the components of an index with the holdings of mutual funds, as reported to the Securities and Exchange Commission. The active share of the fund is a measure of the overlap between an index and the fund's holdings. The more the fund differs from the index, the greater the active share. A closet index fund is defined as one where the active share is less than 60%—the smaller the percentage, the less actively managed it is.
It was found that funds with an active share greater than 70% beat their benchmark index by 1.39%, but those funds that closely mirrored the funds returned 1.41% less because of high fees. It was also found that the bigger the fund became, the more it mirrored the index.
Exchange-traded funds and closed-end funds both derive their value from the portfolio of securities that they contain, and both trade on stock exchanges just like a stock. The fundamental difference between the two is that an ETF has an arbitrage mechanism that allows participating institutional investors and market specialists to exchange the ETF shares for the basket of securities that it represents, whereas closed-end fund has no such method of narrowing the gap between NAV and the CEF share price.
Thus, CEFs can often be bought at a greater premium or discount to their NAVs, although most closed-end funds sell at a discount. An example of this discrepancy:
"The iShares MSCI Brazil Index (EWZ:Amex) ETF, which also tracks stocks traded in Brazil, had a recent market price of $26.67, offering only a slight 0.34% discount to its $26.76 NAV. For example, The Brazil Fund's (BZF:NYSE) average discount to net asset value has been 16% over the past five years. Substantial price appreciation, however, has cut that discount practically in half. The fund is currently trading at $39.30, just an 8.5% discount."
Buying a CEF at a discount increases the effective interest rate, since the income received is not affected by the market price of the CEF. However, because a CEF is actively managed, this creates more expenses for the fund and more capital gains taxes for the investor. Whether CEFs do better than ETFs depends on whether the manager can outperform the indexes enough to overcome the greater expenses, and so, in evaluating a CEF, one needs to assess the manager's ability by looking at his experience and the performance of the fund under his direction.
This article discusses several country funds, especially where a country fund has both an ETF and a CEF, and concludes that CEFs are generally more profitable than ETFs. Examples: The iShares MSCI Brazil Index (EWZ:Amex) ETF and The Brazil Fund's (BZF:NYSE); The Korea Fund (KF:NYSE) 22.5% annually over the past five years; the iShares MSCI South Korea Index (EWY:Amex) ETF up 13.28% per year; The Spain Fund (SNF:NYSE) up 11.88% a year since 2000 vs. 8.44% for the iShares MSCI Spain Index (EWP:Amex) ETF. An exception has been the Germany Fund (GER:NYSE) down 5.8% annually compared to the iShares MSCI Germany Index (EWG:Amex), down 1.2%.
Seems like a reasonable explanation. Some investment tips are offered in how to take advantage of this phenomenon.
Prospectus Finder — Download a prospectus for any U.S. fund.
Top Performers — Best-performing funds by sector, style, and strategy.
Exchange-Traded Funds — Learn more about ETFs. They are built like mutual funds, but trade like stocks.
The Mutual Fund Cost Calculator enables investors to easily estimate and compare the costs of owning mutual funds. The Cost Calculator takes the mystery and math out of the cost equation, revealing how costs add up over time.
Mutual fund costs take a big chunk out of any investor's return. That's why it's important for investors to know what costs they are paying, and which cost structure is best for them. By using the Cost Calculator investors will find answers quickly to questions like this: Which is better, a no-load fund with yearly expenses of 1.75% , or a fund with a front-end sales charge of 3.5% with yearly expenses of 0.90% ?
| Custom Search |