When ETFs hit the scene, everything changed for the mutual fund world. Yes, mutual funds are actively managed, but their costs (especially those with loads) meant that their performance had to significantly exceed their ETF counterparts to make an investment worthwhile. I also found that it was more difficult to trade mutual funds through most brokerages and also more expensive. Even investing directly through the mutual fund company wasn't very attractive, because they would slap on fees if one traded the fund too much.
So that's why a few ETFs have become more attractive choices as proxies for some legendary mutual funds.
For a very long time, you had to be very lucky or have $25,000 lying around to muscle your way into the popular Vanguard Health Care Fund. It was exceedingly well-managed, outperformed all the comparative indices and had reasonable expenses. Today, the fund only carries an expense ratio of 0.35%. It's ETF counterpart, or at least the one I prefer as a counterpart, is Powershares Dynamic Healthcare (NYSEARCA:PTH). Although it's expense ratio is 0.65%, the difference isn't enough to upset me. More to the point, however, its performance vastly differs. From peak-to-trough during the financial crisis, the Vanguard fund lost 47%. It has since put on a 70% gain. The ETF was down 49% but has jumped 108%. I'll take that extra 0.3% expense ratio in exchange for the same downside and much larger upside. And it holds plenty of recognizable names: Biogen Idec (NASDAQ:BIIB), McKesson (NYSE:MCK), Humana (NYSE:HUM), Cigna (NYSE:CI) and Cardinal Health (NYSE:CAH).
One of the most well-known names in the mutual fund world is T. Rowe Price Capital Appreciation. This 5-star Morningstar-rated fund has a 10-year annualized return of 8.31%, returned 122% total over 10 years and ranks first in its category. It carries a 0.70% expense ratio. From peak-to-trough, it was hit for a 49% loss and has since leapt back 84%. Meanwhile, PowerShares Buyback Achievers (NYSEARCA:PKW), considered a large-cap blend ETF, took a 54% hit during the financial crisis but has since roared back 123% ... with an expense ratio of only 0.70%. Here's the thing -- some may consider that the Price fund is a mix of stocks and bonds, which should afford it a greater level of safety. But you only saved 5% of downside and had to pay a higher price for it. Meanwhile, you aren't seeing nearly the same upside for that higher price. Plenty of great names in here, including ExxonMobil (NYSE:XOM), DIRECTV (NASDAQ:DTV), Sears (NASDAQ:SHLD), Wal-Mart (WBM) and IBM (NYSE:IBM).
With the plethora of ETFs available these days, holding on to mutual funds makes less and less sense
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.