Conference Notebook: On ETFs, Fund Costs and Fidelity's Cryptic Faves

CHICAGO -- The viability of ETFs was tacitly proven in Chicago Monday.

During a roundtable at the 2001 Morningstar Investment Conferrence, an audience of 600 or so financial advisers was asked if they used exchange-traded funds in building their clients' portfolios. Nearly half raised their hands.

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On ETFs, Fund Costs and Fidelity's Cryptic Faves

No Room at the Value Fund Inn for Tech

ETFs are essentially index-tracking portfolios that trade on an exchange like a stock. The benefits of ETFs are that they typically offer lower costs and greater tax-efficiency than traditional mutual funds. (For more details on ETFs, check out this primer.)

For instance, the S&P 500-tracking Standard & Poor's Depositary Receipts(SPY), or SPDRs, levy 0.12% annual expenses and Barclays iShares S&P 500(IVV) charges 0.09%. The (VFINX)Vanguard 500 Index fund, by comparison, carries 0.18% expenses. Its Admiral shares -- for long-term holders with big accounts -- charge 0.12%.

Vanguard recently entered the ETF market with its Vanguard Total Stock Market VIPER.(VTI)

ETFs vs. Index Funds vs. Folios

Vanguard index-fund guru Gus Sauter and Brad Zigler of Barclays Global Investors debated ETFs vs. traditional index funds regarding expenses.

The upshot: Yes, ETFs are often cheaper than traditional index funds, but they typically carry brokerage commissions whenever you buy or sell shares. So, if you plug a set amount of money into a fund each month, the traditional index fund makes sense. But if you're investing lump sums, an ETF might be a better choice.

Of course, there's another choice, presented by Steven Wallman of FOLIOfn, who shared the podium with Sauter and Zigler. Wallman's firm offers self-managed baskets of stocks at a low cost. Investors can build folios, not registered as funds, to passively track an index, actively pick stocks, or do a little of both.

The talk on funds' costs has added significance these days. PIMCO bond jefe Bill Gross predicted 5% annual stock market returns in the next few years. If so, expenses may factor more into investors' decisions. As Morningstar senior analyst Scott Cooley noted, the average fund posted a 6% annualized gain over the past three years, but that gain drops to just 2% after fees and taxes, according to his math.

Given that returns may be slipping, ETFs are worth a look. The SPDRs and Nasdaq 100 Trust(QQQ) shares are both among the 25 biggest funds in the nation.

Cracking the Fido Code

Fidelity fund managers aren't allowed to talk about individual stocks, but Stephen DuFour, manager of the (FEQTX)Fidelity Equity Income II fund, gave a few vague hints about some companies that attracted his eye -- which got this reporter guessing.

Slapping labels Company A, B and C on real stocks he's checking out, it seems the Company A and Company B this value investor is sniffing around are Cisco(CSCO) and AT&T(T), respectively -- a reporter's educated guess.

Why, you ask? Well, Company A was described as a powerhouse that is mired in a cyclical downturn after outrageous growth. But, DuFour says, Company A has the dominant market position and stands to gain when things improve. More of the description, not to mention the charts he used, seemed to suggest networking-gear maker Cisco.

Company B, meanwhile, was discussed in terms of breakup value, and how the sum of its parts is worth more than the whole is currently trading at. This and other hints seem to indicate AT&T.

As for Company C, that discussion was too cryptic, so this reporter won't even venture a guess.

Dufour, meanwhile, also addressed many investors' pet peeve with Fido: high manager turnover.

"I think turnover is good, but too much is bad. It's good because it incentivizes the lower ranks. If the managers at Fidelity, Putnam and MFS didn't leave until they're 85, how would they hire anyone?"

One wonders if Fidelity fund shareholders would agree. Consider the rough times at (FDEGX)Fidelity Aggressive Growth since Erin Sullivan dropped the reins on Valentine's Day last year. Over the past 12 months, new manager Bob Bertelson is down more than 50%, trailing 95% of the fund's big-cap growth peers, according to Morningstar.

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