With all due credit to Beyonce's husband Jay Z, the ETF Professor is unveiling a new weekly feature where the ongoing battle between mutual funds and ETFs will be examined on a deeper level.
The objective is to compare a mutual fund with a suitable ETF alternative. Admittedly, the idea is to find examples of ETFs that offer superior cost and performance advantages relative to a comparable mutual fund.
Knowing that some folks can be sensitive about these type of comparisons, it must be noted that absolutely no preference is given to a particular ETF sponsor over another.
Likewise, the intent is not to deride any mutual fund family. Rather, the idea is to present the data and facts to better inform investors about exactly what they are getting with a particular mutual fund and what they are missing out on with the equivalent ETF.
Without further ado, here goes the first edition of "99 Problems, But an ETF Isn't One" featuring the Fidelity Energy Advisor Fund Class A (FANAX) and the Energy Select Sector SPDR (XLE), the largest energy sector ETF by assets with nearly $7.7 billion.
By overall holdings, FANAX is larger with 83 compared to 43 for XLE, though the two funds share six of the same top-10 holdings. Those stocks are Exxon Mobil (XOM), Chevron (CVX), Occidental Petroleum (OXY), Anadarko Petroleum (APC), National Oilwell Varco (NOV) and EOG Resources (EOG).
At least we assume that is the case. Many mutual fund providers do not update their holdings on a daily basis. FANAX's top-10 holdings are "fresh" as of December 31, 2012, as Fidelity data indicate. XLE's top-10 holdings are fresh as of March 21, 2013.
Assuming no major changes, one can give a slight nod to FANAX because as of the end of last year, its top-10 holdings represented 49.25 percent of its overall weight. Exxon and Chevron alone combine for over 32 percent of XLE's weight.
An obvious black mark against the mutual fund is its costs. FANAX's net expense ratio is 1.15 percent, but investors that opt to sell the fund after owning it for less than 30 days will be hit with another 75 basis points in fees. There is also the matter of a pesky $2,500 minimum investment.
There is no minimum investment with XLE, which charges 0.18 percent per year, making it the second-cheapest energy sector ETF. No minimum investment, lower fees and investors can see the portfolio's holdings updated every day with XLE. This discussion could end right now and most juries would likely rule in favor of XLE.
Well, to be fair, performance must be evaluated. Perhaps FANAX can win on that metric and justify some of its aforementioned disadvantage. To be fair, it must be noted that, according to Fidelity data, FANAX is up 8.8 percent year-to-date as of March 21. Including today's gain, XLE is up about 7.6 percent.
However, XLE shines over longer time frames. Here are FANAX's load-adjusted one-, three- and five-year returns: -4.96 percent, 6.68 percent and -3.55 percent. That is as of February 28, 2013. As of the same data, XLE was up more than six percent in the past year, 13.5 percent in the past three years and almost 2.2 percent over the prior five years, according to State Street data.
Maybe FANAX can make a claim to offering better risk-adjusted returns? Actually, no it cannot. The mutual fund has a beta of 1.52 and a standard deviation of 25.98 percent. XLE's beta against the S&P 500 is 1.28 with annualized volatility of 23.16 percent.
Perhaps the worst thing that can be said of XLE compared to FANAX is that the ETF is excessively weighted to just two stocks, Exxon and Chevron. However, the mutual fund's web page indicates nearly 34 percent of its portfolio is allocated to stocks with market values of $50 billion or greater.
Given that the individual weights of the fund's are not broken out on the web page, all investors can do is make an educated guess regarding what stocks dominate FANAX. However, it appears reasonable to assume that since Exxon, Chevron and Occidental all have market values north of $50 billion and are the mutual fund's top-three holdings, those stocks are the primary drivers of the fund's returns.
In other words, FANAX and XLE share a few things in common, expect the really important things such as investors' cost and performance.
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