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The Independent Investor: This Fund is a WinnerBy Bill Schmick
iBerkshires Columnist
08:49PM / Thursday, February 05, 2009
 | | Bill Schmick |
From time to time, a really interesting fund will come to my attention. One such fund, the ETF Market Opportunity Fund (ETFOX), has chalked up some impressive returns over the last several years and appears ready to offer investors a rewarding and safe ride out of this recession.
Better yet, the manager, Paul Frank, is a local boy living with his family in Old Chatham, N.Y.
Paul, 46, manages his $12 million fund from his Colonial farmstead nestled beside one of the many roads of rural Columbia County. It hasn't been easy for Paul but in May of this year, he will have a five-year track record that will be the envy of many fund managers. His fund is already gaining attention.
For those who aren't familiar with Exchange Traded Funds, please see my column "Exchange Traded Funds have Come of Age." In brief, an ETF is an index fund that invests in a set number of stocks, bonds, currencies or commodities that mimic whatever index they target. Once established, they don't change so an investor who buys a share receives approximately the same return as the underlying index. These securities have been around since 1993 and have been my investment of choice for more than 16 years.
Over the last few years a handful of managers around the country have created what are called Funds of Funds. These are mutual funds which invest in a portfolio of ETFs but their results have been spotty at best - except for ETFOX.
Photo by Barbara Schmick
'By using ETFs, I am taking security specific risk out of the equation.'
- Paul Frank
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Over the last 14 months it has ranked in the top one percent of 1,800 large-cap growth funds measured by performance (the top 4 percent on a three-year basis). It is the only ETF fund that is rated highly (5 stars) by Morningstar, the premier mutual fund rating house, as well as by Lipper Fund Services, at which it is a Lipper Leader for Total Return and Preservation of assets.
Frank has a disciplined approach to investing and uses a combination of Modern Portfolio Theory principals and fundamental analysis in selecting from a universe of almost 200 exchange-traded funds. Last year, although he was down, he still beat the benchmark S&P 500 index by over 11 percent and by 3.5 percent over the last three years, and that's after management fees.
So why did Frank decide on ETF investing rather than managing mutual funds or stocks? He explains that ETFs are cheaper with expense ratios less than half those of mutual funds. They also offer certain tax advantages for taxable portfolios. There's another reason as well.
"By using ETFs, I am taking security specific risk out of the equation. Investors will not be wiped out if a component of one of the ETFs suffers a loss."
Frank uses a two-pronged approach to picking the best ETFs for his portfolio. He analyzes the risk versus return of each exchange traded fund and then uses good old common sense to decide if the numbers still make sense. If they do, he adds the ETF to his portfolio, but it's no buy-and-hold strategy.
He monitors each investment, constantly comparing it against both short- and long-term benchmarks and has no compunction in selling one of his funds, especially in this volatile market environment, if the investment goes the wrong way. He also uses inverse ETFs (funds that move up when the markets move down) to protect his portfolio when market conditions demand it.
The fund's main theme is U.S. large cap-growth ETFs. However, between 20 and 25 percent of the fund is reserved for "opportunity areas." In the first half of last year for example, Frank bought the Brazil Country Fund (EWZ) and a gold ETF (GLD) while in the second half he replaced those investments with two U.S. Treasury bond funds, clearly an astute move given the market's performance. He admits that there were very few places to hide late last year, thus the bond investments. He also stayed away from the financial sector, picking defensive sectors like healthcare instead.
This year he has moved into biotechnology, high-yield and corporate bonds, as well as some more aggressive investments but is still wary of the markets. You can see more by accessing his Web site at www.etfmutualfund.com.
So what kind of investor should consider adding this fund to their portfolio? Anyone who is seeking capital appreciation with longer than a one-year time horizon, since historically the fund has returned above-market returns while taking only 75 percent of the market's risk.
But buyers beware since the expense ratio is 2.22 percent, high for a fund management company, but given the performance of Frank's fund, it appears well worth the marginal expense.
Bill Schmick is a licensed investment adviser representative and portfolio strategist as well as a registered financial planner with Berkshire-based Dion Money Management, which manages more than $500 million for middle-class Americans from coast to coast. Direct your inquires to Bill at 1-877-850-7942, Ext. 146, (toll-free) or e-mail him at wschmick@dionmm.com. You can also visit www.afewdollarsmore.com for more of Bill's insight. |
| The manager who achieved the 5 star ranking is no longer with the fund. Plus the fund is very expensive. | | from: Nick S. | on: 03-31-2009 |
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