How to avoid worst sector mutual funds 4Q22 | Jobs Vox


Question: Why are there so many mutual funds?

Answer: Mutual fund management is profitable, so it creates more products that sell on Wall Street.

A large number of mutual funds has nothing to do with serving your interests as an investor. More reliable and proprietary fundamental data will drive my research and fund holding analysis and provide investors with a new source of alpha. I use this data to identify two red flags you can use to avoid the worst mutual funds:

1. High fees

Mutual funds should be cheap, but not all. The first step is to consider what cheap means.

To ensure you’re paying at or below average fees, invest only in mutual funds with total annual expenses below 1.88%, the average total annual expense of the 676 US equity sector mutual funds my company covers. The weighted average is lower at 1.14%, which shows how investors keep their money in mutual funds with lower fees.

Figure 1 The Saratoga Energy and Basic Materials Portfolio (SBMBX) is the most expensive sector mutual fund and the Fidelity Real Estate Index Fund (FSNRX) is the most expensive. Saratoga Advantage Trust ranks among the four most expensive mutual funds, while Vanguard Mutual Fund is among the least expensive.

Figure 1: 5 Most and Most Expensive Sector Mutual Funds

Investors should not pay high premiums for quality holdings. Vanguard Financials Index Fund (VFAIX) is the best-rated sector mutual fund in Figure 1. VFAIX’s independent portfolio management rating and 0.12% total annualized expense make it a very attractive rating. Fidelity Advisor Global Commodity Stock Fund (FIQRX) is the best-ranked mutual fund in the sector overall. FIQRX’s attractive portfolio management rating and 0.97% total annual expense also give it a very attractive rating.

On the other hand, the Vanguard Real Estate II Index Fund (VRTPX) has low total annual expenses of 0.10% but holds weaker stocks and receives a Very Unattractive rating. No matter how cheap a mutual fund is, if it holds bad stocks, the performance will be bad. The quality of mutual fund holdings is more important than the price.

2. Weak Holdings

The hardest part of getting rid of bad mutual funds is getting rid of bad holdings, but it’s also important because mutual fund performance depends more on its content than its price. Figure 2 shows the mutual funds in each sector with worst holdings or portfolio management levels.

Figure 2: Sector Mutual Funds with Worst Holdings

Fidelity and Rydex appear more frequently than the other providers in Figure 2, meaning they offer the most mutual funds with the worst holdings.

Firsthand Technology Opportunities Fund (TEFQX) is the worst-rated mutual fund in Figure 2.
), and Fidelity Advisor Industrials Fund (FCLAX) also get a very unattractive forecast overall rating, which means they not only have poor stocks, but also high total annual expenses.

The danger in

Buying a mutual fund without examining its holdings is like buying a stock without examining its business and financials. Put another way, research on mutual fund holdings is important because mutual fund performance is only as good as the holdings.

Mutual Fund Holdings Performance – Fees = Mutual Fund Performance

Disclosure: David Coach, Italo Mendonca, Kyle Guske II and Matt Shuler receive no compensation for writing about any particular stock, sector or theme.


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