I, like many of you, enjoy the money management aspects of this business. This week I took a fresh look at the categories in which I invest and the vehicles I use with a focus on mutual funds and ETFs. One of the primary questions I had was, "Should I use mutual funds, ETFs, or some combination of both?" The answer, I found, greatly depends on the category.
Before we go there, I should mention that the result is also influenced by the sheer fact that the ETF world is still in its infancy. In fact, according to Morningstar, there are a total of 975 U.S.-traded ETFs and according to the Investment Company Institute, there are 7,000 mutual funds. Therefore, it stands to reason that, the better choices, at least for now, would reside with mutual funds. To avoid confusion, I am speaking in generalities as there are obviously some ETFs which do better than some mutual funds.
In my analysis, I began by selecting what I consider to be the best mutual funds in each category using my fiduciary scorecard and compared them to the ETF world. If I found an ETF which I thought was better than my fund, then I chose the ETF.
With many of the stock categories, I found mutual funds offered the better alternatives. Of course, if you want to buy an index fund, an ETF is a good option. With bonds, I like some of the municipal ETFs such as SHM and SMB. For the rest, it's hard to beat bond shops such as PIMCO, Vanguard, and a few others. That leaves alternative investments. Mutual funds seem to offer better options in the following categories: Long-short, hedge funds, and possibly real estate (I haven't finished looking at real estate). With commodities such as precious metals, industrial metals, and energy, ETFs have some great options.
