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How to pick the Best ETFs and Mutual Funds

On this episode of ETF Spotlight, I talk with Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA. CFRA had acquired S&P Global’s equity and fund research business in 2016.

First off, we discuss fund fee wars that have been heating up of late. Fidelity recently launched four zero fee index funds. As investors become more cost-conscious, major providers have been slashing their fees.  

How important are expense ratios in evaluating ETFs and mutual funds? How should investors choose the right fund for their portfolio? Which other factors should they consider?

Todd pointed out what’s inside the portfolio is also very important. For example, the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares Core MSCI Emerging Markets ETF (IEMG) have the same expense ratio but their exposure is different, resulting in difference in performance, as VWO does not include South Korea.

We discuss other factors that investors should consider when evaluating funds. Further, in case of mutual funds, the track record of the manager is also important.

ETFs have been gaining in popularity against mutual funds over the past few years. While ETFs are not a lot different from passively managed index funds, they do offer better transparency, intra-day tradability and tax efficiency.  When should investors pick an ETF over a similar mutual fund? Find out on the podcast.

While most of the new money is flowing into the cheapest funds, we still see a lot of money invested in traditional active funds. Todd explained that many investors are just comfortable with what they own or they are not aware of cheaper or better alternatives available. At times, there are tax implications too.

Actively managed bond ETFs have been punching above their weight this year. We discuss whether active management produces better results in fixed income. Todd pointed out that in recent years, many actively managed bond funds have beaten the Bloomberg Barclays US Aggregate Bond index, in part by taking on more credit risk.

Smart beta ETFs that lie at the intersection of active and passive management, are gaining in popularity. How should these strategies be used in a portfolio?

As ETFs provide access to a diversified basket of hundreds and sometimes thousands of securities in a single trade, they are frequently being used as building blocks of a low-cost portfolio. ETFs like the iShares Core S&P Total U.S. Stock Market ETF (ITOT), the Vanguard Total Stock Market ETF (VTI), the SPDR Portfolio Total Stock Market ETF (SPTM) and the Schwab U.S. Broad Market ETF (SCHB) provide comprehensive exposure to the US stock market and have expense ratios of just 3-4 basis points.

The IShares Core U.S. Aggregate Bond ETF (AGG), the Vanguard Total Bond Market ETF (BND), the SPDR Portfolio Aggregate Bond ETF (SPAB) and the Schwab U.S. Aggregate Bond ETF (SCHZ) are among the cheapest ETFs that provide exposure to the entire US investment-grade bond market.

Todd recommends that for broad asset allocation, investors should try to stay within the same fund family as firms usually follow different approaches in defining asset classes.

You can follow Todd on Twitter @ToddCFRA and also visit CFRA website to learn more about their research.  

Make sure to be on the lookout for the next edition of the ETF Spotlight and remember to subscribe! If you have any comments or questions, please email podcast@zacks.com.

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SCHWAB-US BR MK (SCHB): ETF Research Reports
ISHARS-1500 IDX (ITOT): ETF Research Reports
VANGD-TOT BOND (BND): ETF Research Reports
VIPERS-TOT STK (VTI): ETF Research Reports
SCHWAB-US AG BD (SCHZ): ETF Research Reports
ISHARS-CR US AG (AGG): ETF Research Reports
VANGD-FTSE EM (VWO): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
SPDR-PRT AGG (SPAB): ETF Research Reports
ISHARS-CR MS EM (IEMG): ETF Research Reports
SPDR-PRT TSM (SPTM): ETF Research Reports
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