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On
March 21, 1924 three Boston businessmen pooled together
$50,000 to form a company called the Massachusetts
Investor's Trust. The purpose of the company: to
invest in the roaring 1920s stock market boom.
These three men unwittingly gave birth to a financial revolution.
In fact, in the ensuing 80 years their invention, the mutual fund,
has come to dominate the retail investing landscape.
By 2006, U.S. mutual fund assets had grown from that $50,000 seed
invested in a single fund into $8.9 trillion invested across
roughly 9,000 different funds. Over 50 million American households now own mutual funds,
making them by far the most popular and common means of
participating in the stock market.
So with all that success, why then are mutual fund
executives so nervous? After years of unchallenged
dominance of the retail investing landscape, there's a new
kid on the block -- a new asset class that threatens to
challenge the mutual fund's pre-eminence.
And the mutual fund industry is vulnerable to that
competition. Mutual funds have become popular largely
because they've been the only game in town for millions of Americans. Many retirement funds
mandate investments into hand-selected funds. In addition, mutual
funds have been, until recently, the easiest way to diversify a
portfolio among a broad selection of different stocks.
Mutual funds have taken full advantage of this near
monopoly. Fees charged for managing that $8.9 trillion
are significant -- the average open-ended mutual fund in
fund tracker Morningstar's database charges an expense ratio
of 1.34%. And to make matters worse, many mutual funds
also charge hefty front- and back-end loads that can reach
as high as 5% of assets. That's a steep price to pay
just for the privilege of purchasing a high-cost mutual
fund.
High Fees Erode Your Portfolio Returns
At first glance, mutual funds' 1.34% average fees might seem
like small potatoes. But that's certainly not the case.
In fact, when you consider that U.S.
investors have poured $8.9
trillion into mutual funds, that adds up to a whopping
expense of $119.3
billion each and every year. (That's why I call it "The
$120
billion Wall Street Heist.")
To get an idea of what this might mean for your portfolio, take a
look at my chart. It shows the total fees that an
investor would pay over time to an average mutual fund assuming an initial investment of
$100K and capital
gains of 12% per year.
As you can see, after 30 years, that seemingly insignificant 1.34%
expense ratio can add up to exorbitant total fees of over
$270,000!
A New Breed of Low-Cost Fund
Like me, you're probably wondering how to maximize returns in
today's choppy markets. Well, one way is simply to reduce
the fees you pay on your investments. Every dollar you pay
to a mutual fund means a dollar less in your pocket. That's
why we -- along with millions of other investors -- have embraced
a revolutionary new asset class that's emerged to challenge the
mutual fund industry's dominance.
These unique financial instruments are essentially passive
funds -- similar to traditional index funds -- that allow
investors to purchase a basket of securities in a single
transaction. They're traded on the NYSE, AMEX and Nasdaq just like
stocks. And most importantly, they charge some of the lowest
expenses in the industry -- an average of just 0.43%.
That's less than one-third of the steep 1.34% fee
levied by the typical mutual fund!
I'm speaking, of course, about
exchange-traded funds (ETFs). Let's take a look at the cost savings
that ETFs could help you generate
over an extended period of time.
The chart to the right uses the same example, but it also shows
the much lower fees you'd end up paying by investing in ETFs.
And keep in mind that this example doesn't include the many
other fees levied by some mutual funds, including steep front-
and back-end loads.
The story gets even more interesting when you look at total
returns. In the example above, that initial $100K investment
would have turned into $2.0 million if invested in mutual funds
for 30 years. By comparison, the same investment
in ETFs
would have resulted in a portfolio valued at $2.6 million -- an
increase of $600,000! And remember, both of these examples
assumed the exact same rate of return. The only difference
-- the much higher expense ratio charged by mutual funds.
What's Behind the Popularity of ETFs?
Thanks in large part to their low expenses, investors can't get enough of exchange-traded funds. In the
mid-1990s, less than two dozen of these funds were trading on the
American Stock Exchange. Today, more than 600 different ETFs --
worth over half a trillion dollars in total market value -- trade
on all of the major U.S. exchanges.
In fact, ETFs are the
fastest-growing segment of the fund market. Investors poured some
$146 billion into the 291 new ETFs that debuted last year. That's
an average of nearly 25 new exchange-traded funds per month.
ETFs
have grown in popularity thanks to the following important
advantages:
Low Cost -- Since ETFs don't require research
analysts and other investment specialists to manage them, their
fees are very low. They
also don't charge any
front- or back-end loads.
As a result,
investors get to keep a bigger share of the returns.
Liquidity -- Whereas traditional mutual funds are only
priced at the end of the day, ETFs can be bought and sold at any
time throughout the trading day. Many have average daily
trading volumes in the hundreds of thousands (and in some cases
millions) of shares per day, making them extremely liquid.
Tax Savings -- Most ETF dividends qualify for the lower
dividend tax rate of up to 15%, making these funds suitable for a
taxable brokerage account. And some ETFs also offer dividend reinvestment plans, which
allow shareholders to reinvest dividends to purchase
additional shares.
Use ETFs to Capture Yields of 14.6%
When most investors think of ETFs, they
think of broad diversification and low expense ratios. But
if you're in search of income, then I've got great news for you --
many of these funds also deliver exceptionally high dividend
yields.
In fact, ETFs have come a long way since the first dividend-focused
ETF arrived on the scene in November 2003. Today, yield-hungry investors
have scores
of these funds to choose from, with
some two dozen ETFs offering yields of up to 10% and higher.
In the most recent issue of my premium newsletter -- High-Yield
Investing -- I
highlighted some of the most attractive ETFs
on the market, including an ultra-safe utility fund with a 10.3%
yield, an international fund paying 8.8%, and a diversified real
estate fund with dividends of 14.6%, among many others.
If you'd like to learn the names of these ETFs -- plus
receive a steady stream of stocks, trusts, preferreds and other
investing ideas with abnormally high yields each and
every month -- then I'd like to extend you a personal invitation
to try my premium income investing newsletter . . . High-Yield
Investing. Visit
this link to learn more.
Thanks for joining me on my search for today's
highest-yielding securities!
-- Carla Pasternak
Co-Editor
Global Dividend Opportunities
GlobalDividends.com
839-K Quince Orchard Blvd.
Gaithersburg, MD 20878-1614
P.S.
-- Don't miss a single issue! Add our address, Editors@GlobalDividends.com,
to your Address Book or Safe List. For instructions, go
here.
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