Mutual Funds

Calculating ETF Costs

The table below shows the one- and five-year costs for owning $10,000 of the PIMCO Total Return ETF (BOND), the company’s flagship fund. The table assumes a $7 charge to buy and sell the fund and a bid-ask spread of 0.02% (source: IndexUniverse, October 2012).

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Fund Yield

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Diversified REITs

Fund Yield

Generally, a fund’s yield is whatever it pays out during the year in dividends and interest. For example, if a fund is selling for $20 a share and paid out $1 in dividends and interest payments, its yield would be 5%. Because a fund’s investments and its payouts change over time, advisors need to understand the difference between its 12-month yield and the SEC yield. 

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Largest ETF Families

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Leveraged Loan Funds

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Fund Yield

Leveraged Loan Funds

Leveraged loan ETFs and mutual funds are sometimes recommended when there is a fear of rising interest rates. The interest rate on these loans is usually adjusted quarterly, thereby eliminating most, if not all, interest rate risk. However, the great majority of these loans have a junk rating, similar to high-yield corporate bonds. 

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Tax Deduction

Correlations and Fund Returns

For the 2011 calendar year, just 23% of mutual funds outperformed their benchmark. The correlation between the S&P 500 and the stocks within the index averaged a record 86% (0.86) for the year. Some argue that a high correlation makes it harder for a mutual fund manager to pick winners.  During the decade 2002-2011, the average correlation between stocks in the S&P 500 and the index itself averaged 56% (0.56). However, during most years, large cap managers have lagged their benchmarks when correlations were high and when correlations were low.

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Money Market Accounts

Money Market Accounts

The term “money market” can refer to two different products: [1] one is offered by the mutual fund industry and [2] the other is a type of bank account wherein the lender sets the interest rate. As of the beginning of 2012, ~ $2.7 trillion was in money market mutual funds while close to $6 trillion were in bank money market deposit accounts. The average money market yield was 0.06% while at banks it was 0.15% (Feb. 10, 2012, source: Crane Data).

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ETF Tax Efficiency

ETF Tax Efficiency

Taxable investors may prefer ETFs over mutual funds due to a regulatory loophole that shields investors from capital gains distributions until final sale of the ETF. As shown in the table below, many popular foreign and global ETFs have not ever paid capital gains distributions (at least from their 2007-2008 inception to Dec. 2011). 

Two Myths About Equity Funds

There are two myths about equity funds: [1] management may be forced to sell some fund holdings because of increased redemptions during bear markets (thereby triggering unwanted capital gains) and [2] embedded capital gains for equity funds can eventually trigger unwanted gains (particularly to newer investors who did not enjoy the previous appreciation that is now called “embedded”).

Indexing Vs. Active Management

Although it is difficult to predict the likelihood that actively managed mutual funds will outperform their benchmark index over any 12-36 month period, there is a high level of predictability that index investing will outperform actively managed funds when looking at any given 5-year period—as shown in the table below.

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