Sounding the Alarm on Mutual Funds

Scandals. Mergers. Government agents on the prowl. Is this a promo for a new TV drama? Maybe the plot of a blockbuster movie?

Nah, it's just another year in the mutual fund industry.

It's time once again to ring out the old and ring in the new. And when it comes to highlighting the year in mutual funds, there is no better person to sound the alarm than Roy Weitz, the California-based mutual fund advocate. A lawyer and CPA by trade, Weitz is the founder and editor of FundAlarm.com, a free site that tracks the mutual fund industry by alerting investors to cheating fund families and poor performers.

TheStreet.com recently caught up with Weitz to get his views on the biggest fund stories of 2006, as well as his predictions for 2007.

What were the biggest trends in the mutual fund industry in 2006?

Lifecycle funds continued to multiply. Large fund companies continued to acquire smaller ones, and, even more dramatically, just a handful of the largest fund companies had another year in which they took in the lion's share of new investment dollars.

Also, ETF offerings continued to explode -- in fact, some would say that the ETF creators finally went off the deep end in 2006, although we suspect there's even more to come in 2007.

Are exchange-traded funds a threat to mutual funds, or is it just a lot of hype?

As of October 2006, ETF assets under management represent about 3.5% of total mutual fund assets. Given all the talk about ETFs, you'd think that this percentage would be much, much higher, so yes, I think the current threat to mutual funds is a lot of hype. The vast majority of specialized ETFs being introduced today will never get very large, because they simply don't have mass market appeal and never will. ETFs that follow more conventional indexes have some potential to compete with index mutual funds, but there's no reason to believe that all ETF index funds, combined, will ever have more assets than all traditional open-end mutual funds, combined, and traditional open-end mutual funds, in total, still represent a fairly small part of the overall fund universe.