With all due credit to Beyonce's husband Jay Z, the ETF
Professor is unveiling a new weekly feature where the ongoing
battle between mutual funds and
will be examined on a deeper level.
The objective is to compare a mutual fund with a suitable ETF
alternative. Admittedly, the idea is to find examples of ETFs
that offer superior cost and performance advantages relative to a
comparable mutual fund.
Knowing that some folks can be sensitive about these type of
comparisons, it must be noted that absolutely no preference is
given to a particular ETF sponsor over another.
Likewise, the intent is not to deride any mutual fund family.
Rather, the idea is to present the data and facts to better
inform investors about exactly what they are getting with a
particular mutual fund and what they are missing out on with the
Without further ado, here goes the first edition of "99
Problems, But an ETF Isn't One" featuring the Fidelity Energy
Advisor Fund Class A (
) and the Energy Select Sector SPDR (NYSE:
), the largest energy sector ETF by assets with nearly $7.7
By overall holdings, FANAX is larger with 83 compared to 43
for XLE, though the two funds share six of the same top-10
holdings. Those stocks are Exxon Mobil (NYSE:
), Chevron (NYSE:
), Occidental Petroleum (NYSE:
), Anadarko Petroleum (NYSE:
), National Oilwell Varco (NYSE:
) and EOG Resources (NYSE:
At least we assume that is the case. Many mutual fund
providers do not update their holdings on a daily basis. FANAX's
top-10 holdings are "fresh" as of December 31, 2012,
as Fidelity data indicate
. XLE's top-10 holdings are fresh as of March 21, 2013.
Assuming no major changes, one can give a slight nod to FANAX
because as of the end of last year, its top-10 holdings
represented 49.25 percent of its overall weight. Exxon and
Chevron alone combine for over 32 percent of XLE's weight.
An obvious black mark against the mutual fund is its costs.
FANAX's net expense ratio is 1.15 percent, but investors that opt
to sell the fund after owning it for less than 30 days will be
hit with another 75 basis points in fees. There is also the
matter of a pesky $2,500 minimum investment.
There is no minimum investment with XLE, which charges 0.18
percent per year, making it the second-cheapest energy sector
ETF. No minimum investment, lower fees and investors can see the
portfolio's holdings updated every day with XLE. This discussion
could end right now and most juries would likely rule in favor of
Well, to be fair, performance must be evaluated. Perhaps FANAX
can win on that metric and justify some of its aforementioned
disadvantage. To be fair, it must be noted that, according to
Fidelity data, FANAX is up 8.8 percent year-to-date as of March
21. Including today's gain, XLE is up about 7.6 percent.
However, XLE shines over longer time frames. Here are FANAX's
load-adjusted one-, three- and five-year returns: -4.96 percent,
6.68 percent and -3.55 percent. That is as of February 28, 2013.
As of the same data, XLE was up more than six percent in the past
year, 13.5 percent in the past three years and almost 2.2 percent
over the prior five years,
according to State Street data
Maybe FANAX can make a claim to offering better risk-adjusted
returns? Actually, no it cannot. The mutual fund has a beta of
1.52 and a standard deviation of 25.98 percent. XLE's beta
against the S&P 500 is 1.28 with annualized volatility of
Perhaps the worst thing that can be said of XLE compared to
FANAX is that the ETF is excessively weighted to just two stocks,
Exxon and Chevron. However, the mutual fund's web page indicates
nearly 34 percent of its portfolio is allocated to stocks with
market values of $50 billion or greater.
Given that the individual weights of the fund's are not broken
out on the web page, all investors can do is make an educated
guess regarding what stocks dominate FANAX. However, it appears
reasonable to assume that since Exxon, Chevron and Occidental all
have market values north of $50 billion and are the mutual fund's
top-three holdings, those stocks are the primary drivers of the
In other words, FANAX and XLE share a few things in common,
expect the really important things such as investors' cost and
For more on ETFs, click
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