Don't spend $ on new fund's gimmick

By Chuck Jaffe / Your Funds
Tuesday, April 22, 2008 - Updated 7m ago
+ Recent Articles + Email


For years, the mutual fund industry has talked about creating actively managed exchange-traded funds, and I always figured that the very first one - heralding the new genre of ETF - would be a Stupid Investment of the Week.

I wasn't wrong.

Last month marked the debut of Bear Stearns Current Yield, and while there is no truth that its ticker symbol "YYY" is shorthand for investors wondering "Why, why, why would I buy this?" there's no denying that the fund qualifies as Stupid Investment of the Week.

Note: It's important to note that not all companies who offer Mutual Funds are reliable.

First, it's important to note that the issue here is not with Bear Stearns, the troubled financial-services firm. Shareholder money in the fund is safe and segregated.

The problems with Bear Stearns Current Yield fund involve what the fund itself can deliver, which probably won't live up to anyone's expectations for actively managed ETFs.

ETFs are built like index mutual funds but traded moment-by-moment like stocks. They tend to be low-cost, tax-efficient baskets of securities, designed to track an index or specific market strategy.

Used correctly, they can be a great alternative to traditional mutual funds. That's partly why so many industry watchers have been clamoring for actively managed ETFs, where the fund is run based on the intuition and decisions of an expert, rather than a passive, follow-the-benchmark strategy. A traditional actively managed mutual-fund not only would have greater costs, but can only be bought or sold at the day's closing price.

Lost amid the excitement of the first active ETFs is the constricted nature of the Bear Stearns fund's mandate. The very asset class involved diminishes the ability of a manager to deliver superior returns, meaning shareholders aren't likely to get what they expect from the fund.

Bear Stearns Current Yield buys short-term debt to generate income. That means it purchases government securities, corporate debt, mortgage-backed and asset-backed securities, municipal bonds, foreign debt obligations, and the like.

The trouble is, there's not a lot of value that an active manager can add to short-term bond funds and money market funds. In fact, studies have shown that the biggest determining factor between the top funds and the laggards has much less to do with the assets they choose than with the costs associated with the fund.

Bear Stearns Current Yield is charging 0.35 percent in expenses, thanks to a reimbursement that management is making to the fund. That's competitive - better than the 0.47 percent charged by the average money market fund, according to Crane Data - but not great in the realm of bond funds. It's roughly double the expenses on the Vanguard Short-Term Bond Index fund, which also has an ETF sibling - that is cheaper too - and that's before brokerage charges are tacked on.

Moreover, because ETF shares trade like a stock, there's a brokerage commission for every buy and sell. While that's no big deal for people paying a few bucks per trade with a discount broker, it can add a significant layer of costs to ordinary expenses in some circumstances. It's likely to eat up any edge over the average money fund, for example.

"If you trade in this fund, you fritter away any expense advantage that ETFs might normally have," says Jeff Ptak, director of ETF research at Morningstar Inc. in Chicago. "While the liquidity can be valuable, I'm not sure it justifies paying higher costs or transaction fees."

Note: ETF is indeed a good potential to invest into.

Indeed, it's hard to think of a situation where an average investor bailing out at noon from a stable investment such as a Treasury fund would wind up protecting more money by "getting out now" than they pay in commissions. They're not much better off than if they owned a traditional fund and got the end of the day price, without any trading charges.

"This fund is pretty darned close to just holding cash," says Gregg Brewer, executive director of research at Value Line. "As such, it's not that cheap when you factor in commissions."
Chuck Jaffe is senior columnist for MarketWatch.

Next Article in Business & Markets:
Trader in a fish bowl

Related Links


Contact us | Print advertising | Online advertising | Herald history | News tips | Electronic edition | Browser upgrade | Home delivery | Herald wireless

$ave on Boston Herald Home Delivery

Jobs with Herald Media