ETFOX: The ETF Mutual Fund That Continues to Outsmart the S&P 500

Since its selection as Fidelity Independent Adviser’s Best Fund for Second Quarter 2009, Paul Frank’s ETF Market Opportunity Fund (ETFOX) has continued to beat the S&P 500. While Frank’s ETF based mutual fund has grown dramatically, his methodology has remained consistent, and he continues to attribute his success to both the transparency of ETFs and the fundamental oversight that a mutual fund provides.

In a follow up interview, provided below, Frank provided timely insight into recent changes in his fund holdings and explained how recent market events have impacted ETFOX.

Q: How have recent market conditions, including the March rally, impacted the composition of your portfolio?

A: ETFOX is designed to react to market movement, so several of my positions have changed along with the market in recent weeks. My model led me to trim my exposure to fixed income, and while I dropped the Proshares UltraShort 20+ Year Treasury Fund (TBT) in March, I began buying shares again on April 14. At the beginning of the March rally, I added large-value ETFs to the fund but have since moved to small cap growth. Technology ETFs have performed well, and I have added Vanguard Information Technology ETF (VGT) to the fund, while increasing my position in iShares S&P North American Tech-Semiconductors (IGW). The core of ETFOX is still large growth funds.

Q: Will the size of the fund impact your investment decisions?

A: Short answer: no. One of the most important benefits that ETFOX continues to bring investors is a fundamental filter for the increasingly large pool of ETF products. Over time my fundamental work has eliminated thinly traded or poorly managed ETFs from my rankings. My fund structure allows me to easily add or drop ETFs as my rankings change. This flexibility has actually allowed me to add a little more diversification to the fund.

Q: Have any ETFs made unexpected moves in your rankings? Which ETFs have gained or lost recently according to your formula?

A: While value ETFs had a pop in mid March due to their large percentage of financial services, small cap ETFs have recently advanced in my rankings. I currently own Vanguard Small Cap (VB), Vanguard Small Cap Growth (VBK) and ProShares Ultra Russell 2000 (UWM). iShares Dow Jones US Aerospace & Defense (ITA) has also been climbing in my rankings, and I’m slowly accumulating shares. iShares MSCI Hong Kong Index (EWH) has also moved up my rankings quickly, and we're experiencing nice gains in that fund.

Q: What are the fund’s top holdings now?

• PowerShares QQQ 14.31%
• iShares Russell 1000 Growth Index 10.17%
• Vanguard Growth 9.41%
• Vanguard Small Cap 8.44%
• iShares G.S. Semiconductor 7.94%
• Vanguard Info. Tech. 7.00%
• Vanguard Value 5.03%
• iShares Dow Energy 4.55%
• Vanguard Small Cap Growth 4.27%
• Ultra Russell 2000 Proshares 3.27%

To read Paul Frank’s Fidelity Independent Adviser interview, please click on the following link.

To read Fidelity Independent Adviser’s Special Report on ETFOX, please click on the following link.

Comments

[Donkey Kong:]

Who cares if ETFOX continues to "outsmart the S&P 500". The SPX is not meaningful benchmark to ETFOX given its concentrated sector holdings in primarily growth and small cap stocks, including leveraged ETFs.

Jul 02 07:18 PM

[Tony Milano:]

Effective September 1, 2009, Don Dion sold all shares of ETFOX in his Growth Portfolio and his Growth & Income portfolio.

Sep 02 09:54 PM

[BucketofOnions:]

Most mutual funds offered by reputable fund companies or families have good intentions. It's in their best interest to perform well and beat their benchmarks. Others make a token effort to perform, and are more concerned with making big profits for the fund company. Here's how the business works, and how to separate the good from the bad.

Professional money managers make the investment decisions in actively managed mutual funds. Only in index funds is performance a given, because they are passively managed to simply track an index. The vast majority of traditional mutual funds are actively managed.

Simply put, it is fund management's job to outperform the market in general, and to beat the competition. If a manger excels at his job, everyone benefits. The manager gets a raise for outstanding performance. The fund company benefits as investors pour more money into the fund because it has proven itself to be a winner. Investors benefit directly as their money grows.

That's how a good mutual fund operates. All funds make their money from the yearly expenses they charge investors. The more money they have under management, the more profit they make for the mutual fund company.

For example, if a fund grows from $1 billion in assets under management to $2 billion and charges investors 1% a year, it basically doubles its income. Much of this goes to the bottom line, since expenses do not increase proportionately.

Now, here's a thought for you. In the past 30 or so years, mutual fund assets under management have grown like crazy. Yet, many stock funds are charging investors 2% and more for yearly expenses while others charge less than 1%.

Why would a large mutual fund company need to charge investors 2% or more? What's the objective here, and whose side are they on?

There is one sure way I know of to separate the good guys from those who are looking out for themselves. Every mutual fund has an EXPENSE RATIO, and it tells the investor how much it costs a year to be invested in the fund. Plus, information is available that compares a fund's expense ratio to other similar funds.

Do not believe for one minute that you get what you pay for. High expenses come out of investors' pockets, and act to directly lower investment returns. No mutual fund can guarantee good performance, but it would be nice to know that your fund is on your side and doing the best it can for you as an investor.
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Sep 27 11:46 PM