Making Money Alert: Are Mutual Funds Lumbering Dinosaurs?

I love Sunday mornings, as I get to get enjoy a little extra sleep followed by a leisurely cup of coffee while reading the weekend edition of my local papers. This Sunday, I picked up a recent hard copy (yes, I still like to hold the physical paper in my hands) of the Los Angeles Times, and in the business section there was a feature article about mutual funds by financial columnist Tom Petruno that I wanted to bring to your attention.

I’m a fan of Tom’s writing, and I’ve been reading his work for years. He’s usually spot on with his analysis, and he always gives readers something to think about. In this article, titled “Exchange-traded funds gain on traditional mutual funds,” Tom discusses the rise of the ETF industry, a trend we’ve been writing about in this publication and in my newsletter services for the past decade.

Here’s one quote that stands out from the Petruno piece: “an increasing number of professional and small investors now see traditional funds as lumbering dinosaurs, doomed to be outmaneuvered and eventually overcome by more efficient and focused ETFs.”

While the term “lumbering dinosaurs” is good literary work, I think this oversimplifies the issue.

You see, while I am a huge fan of ETFs, sometimes mutual funds offer investors better prospects. Some mutual funds are downright nimble, with managers that employ strategies that perform well during specific market periods.

Yes, it is true that many index mutual funds cost more to own (redemption fees and transaction costs) than index ETFs, but I am not referring to these. I do think that buying an index ETF such as the SPDR S&P 500 (SPY) is better than owning a mutual fund pegged to the S&P 500.

Yet what about mutual funds that offer specific manager insight in a sector that most investors have no idea how to approach?

A case in point is the DoubleLine Total Return Bond Fund, a fund managed by what some have called “The New Bond King,” Jeffrey Gundlach. This unique blend of mortgage-backed, fixed-income securities would be nearly impossible to identify and own for the individual investor.

This fund is so specialized that I think it shows at least some mutual funds are far from lumbering dinosaurs, and more like turbocharged cheetahs sprinting across an information-overloaded savannah.

Don’t get me wrong, I love ETFs, and I go to them first as my weapon of choice in the battle for higher returns. What I want you to remember is that while ETFs are fantastic tools for investors, certain mutual funds still offer a whole lot of upside, especially when they have superior managers that really know how to maximize returns for shareholders.

When it comes to the more unique funds, lumbering dinosaurs they are not.

Exploiting the Highway

“A modern fleet of ships does not so much make use of the sea as exploit a highway.”

–Joseph Conrad

Today’s information technology — smartphones, tablet PCs, social media websites — are great tools to help improve our lives. However, just keep in mind that they are merely tools to exploit the information highway. These tools aren’t ends in themselves, but a means of doing things. Remember that the next time you find yourself a slave to the latest email, text message or tweet.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

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