Sector ETFs Put Heat on Select Funds

Sector-specific ETFs may also lure investors away from select funds because they do not have short-term redemption fees.

Even a no-load fund charges a redemption fee if buyers sell before a certain number of days or months have passed, and even after that period has expired, it is typically necessary to wait a day before selling.

For example, an investor who buys Fidelity's (FSAGX Quote)Select Gold Portfolio and then sells it before 30 days are up will face a 75-basis-point redemption fee. On the minimum $2,500 investment, that amounts to an $18.75 fee. On a $10,000 investment, it's a $75 fee.

However, investors who pick up streetTRACKS Gold Shares(GLD Quote), the largest gold ETF, can buy and sell it like a stock and be in and out of a roundtrip transaction for about $20, says Tjornehoj.

Mutual Funds Not Done

John Sweeney, senior vice president of mutual fund product management at Fidelity Investments, notes that short-term trading fees are an industrywide norm used to protect longer-term investors, which is a value-added plus not offered by ETFs.

Indeed, the relative advantages of ETFs over select mutual funds are not as relevant for investors with a medium- to long-term outlook.

"Select fund investors are probably somewhere between a trader and a long-term investor, so it's not hard for that person to hold onto the fund for the duration of the redemption period," Lipper's Tjornehoj says. "And since there's no commission fee to buy or sell, these are still good for investors in it for at least the medium term."

Sweeney agrees, adding that a select fund brings with it active management for investors who want more exposure to a sector.

And mutual fund analysts such as Morningstar's Sonya Morris worry that these more granular ETF products could hurt investors who are not sophisticated enough to trade them. Morris notes that the ETFs could attract performance chasers, just as in stocks.