Mutual funds: Are they ever the best choice?

[mlwl8521]

You’ll never hear this from a typical retail financial advisor, but this is something that I’ve been thinking privately about for years.
In a rewrite of Benjamin Graham’s “The Intelligent Investor”, the author makes a claim
Studies show that low internal expenses are the best predictor of fund performance.
With that said, do you CFAs advocate ETFs over mutual funds generally for the sole purpose of reducing internal expenses?
If any of you use mutual funds, can you give me an example of why you think that is actually the best option? I can only think of one scenario (which doesnt even apply to my client base) but I want to hear what you all have to say first.

 

[ohai]

It’s hard to prove that anything is the “best option”. One thing that differentiates mutual funds from ETFs is active management, but you must generally weigh this against fees.
I don’t see much explicit cost savings in comparable index mutual funds and ETFs. For instance, Vanguard 500 fees are 0.17%, but SPY expense ratio is 0.095%, that is 0.075% difference. Maybe it varies by fund, since there are probably 50 different mutual funds that track any major index.

 

[mlwl8521]

ohai wrote:
It’s hard to prove that anything is the “best option”. One thing that differentiates mutual funds from ETFs is active management, but you must generally weigh this against fees.
I don’t see much explicit cost savings in comparable index mutual funds and ETFs. For instance, Vanguard 500 fees are 0.17%, but SPY expense ratio is 0.095%, that is 0.075% difference. Maybe it varies by fund, since there are probably 50 different mutual funds that track any major index.

True, but I would say that your chosen example is irrelevant because that particularly mutual fund is being pitched as as product that follows a predetermined index/allocation. Thus, there is little management and executive level decision making in the process.
Let’s say for example, that the hired manager was tasked with finding “the best stocks in the Russian sector”
I randomly pulled this up: https://fundresearch.fidelity.com/mutual-funds/summary/44980R219
The ING Russia fund has an internal expense ratio of 2.15%, plus the 5.75% load
In contrast, the RSX russian equities ETF has an expense ratio contractually capped at 0.62%
The holdings are similar: http://finance.yahoo.com/q/hl?s=rsx

 

[former trader]

mlwl8521 wrote:
You’ll never hear this from a typical retail financial advisor, but this is something that I’ve been thinking privately about for years.
In a rewrite of Benjamin Graham’s “The Intelligent Investor”, the author makes a claim
Studies show that low internal expenses are the best predictor of fund performance.
With that said, do you CFAs advocate ETFs over mutual funds generally for the sole purpose of reducing internal expenses?
If any of you use mutual funds, can you give me an example of why you think that is actually the best option? I can only think of one scenario (which doesnt even apply to my client base) but I want to hear what you all have to say first.

Yes, if you DCA in index mutual funds. The more often you DCA in a year, the more the mutual fund is the cheaper option than the ETF.

 

[McLeod81]

Mutual funds give you access to some great active managers. The EMH is BS. Over the long run I’d take a mutual fund managed by a firm like Sands Capital over a R1000 Growth index fund any day. Same goes for many others in different categories.

 

[onlysimon]

mlwl8521 wrote:
If any of you use mutual funds, can you give me an example of why you think that is actually the best option? I can only think of one scenario (which doesnt even apply to my client base) but I want to hear what you all have to say first.

Easy for higher risk styles e.g. iShares Asia ex Japan ETF. v.s. mutual fund e.g. https://www.fidelity.co.uk/pricing/docs/factsheets/institutional/9949.pdf
Look closely and the styles are not the same, I’d prefer the fidelity fund than the etf (actually I hold the etf).
for a corp bond fund, or something to outperform S&P it’s more difficult to find reasons.