Vanguard Cools Hot Fund

Performance chasing is a dangerous maneuver seen across the security spectrum. Often, investors who climb in to mutual funds or ETFs that have spiked face the tough reality of volatility on the way down. Funds that move fast are often the most volatile, and these holdings are often better satellite positions than core components.

Vanguard insists that concerns about performance-chasing, not size, presented the biggest threat to the fund. Despite the fund's burgeoning assets, VCVLX management insists that size did not impact the fund's investment strategy.

This sort of investor risk management, however, could soon be more of a factor for one of mutual funds' greatest competitors: ETFs. Some of these traditionally passively managed investments have begun to actively manage "overheating" risks.

Red hot commodities markets have driven investors into ETFs like United States Natural Gas(UNG) and PowerShares DB Commodity Index Tracking(DBC) in recent months. New futures contract regulation, however, has forced both of these funds to restructure their portfolios before "overheating" and passing position limits.

Investors should consider suitability first when picking an ETF or mutual fund, and the role that the fund will play in big-picture investing. Investors chasing performance may not only be met by an abrupt downturn, but also investment limitations and regulatory uncertainty.

-- Written by Don Dion in Williamstown, Mass.

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