Mutual Funds

Roughly $85 billion was invested in emerging markets bond funds and ETFs as of March 2013. There are two ways to play these types of bond funds: (1) invest in bonds denominated in the local currencies of the issuing country or (2) buy into a fund whose emerging bonds are denominated in a “hard currency,” such as dollars, euros, or yen. 

As of January 2013, three of the largest money market funds—Goldman Sachs, JPMorgan Chase, and Bank of New York Mellon—started to report the daily NAV of their money market funds on their websites. Prior to this, the industry standard was to report NAVs to the SEC monthly. The SEC would then report this information to the public 60 days later.

In the U.S., there are over 710 ETF sponsors. At the beginning of 2013, three companies controlled 84% of ETF assets (BlackRock, State Street, and Vanguard). 

As of November 2012, the ETF marketplace was valued at $1.3 trillion (vs. $10 trillion invested in mutual funds). iShares (BlackRock) remains the largest player with 41% of the marketplace, down from 60% in 2007. Next to BlackRock, the next two largest ETF sponsors are State Street (25% market share) and Vanguard (18% market share). There are over 1,500 ETFs, and almost all of them are passively managed.

REITs are diversified in one of two ways: type of property and location. Critics of diversified REITs contend that transparency is reduced and measurement is more difficult; sector-type REITs can be more easily compared to a more-defined group. Some companies such as Franklin Templeton prefer to only buy REITs for its mutual funds that are specialized in one sector. As of early 2013, the five largest diversified equity REITs were as follows:

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. 

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. 

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.