Mutual Funds Give ETFs Run for Money

Mutual funds are obsolete, according to some advocates of exchange-traded funds, or ETFs. But conventional open- and closed-end funds are very much alive. Many investors have good reasons for preferring the old choices, especially now during the stock-market slump.

To appreciate the appeal of closed-end funds, consider General American Investors (GAM Quote), which invests in blue-chip stocks. During the 10 years ending in July, General American returned 9.6% annually, about 7 percentage points better than SPDR S&P 500(SPY Quote), an ETF that tracks the benchmark Standard & Poor's 500 Index.

The odds are high that General American will outdo the SPDR during the next decade. The reason lies in the structure of closed-end funds. Like ETFs, closed-ends typically invest in portfolios of stocks and bonds. Closed-end shares trade on stock exchanges. Responding to the whims of investors, the shares often sell at premiums or discounts to the value of the securities held in the portfolios of the funds. With investors gloomy about the markets lately, many closed-end funds have sunk to big discounts. General American sells at a discount of more than 10%. That means an investor can pay 90 cents to own more than a dollar's worth of assets in the fund. In contrast, SPDR and other ETFs rarely trade at discounts. You must pay about 100 cents to own a dollar's worth of SPDR. ...