In March, we compared a
a popular energy sector ETF and a comparable
with the idea being to figure out when relevant factors are
considered, which vehicle is best for investors.
That comparison, which involved the Fidelity Energy Advisor
Fund Class A (
) and the Energy Select Sector SPDR (NYSE:
), showed the ETF coming out ahead on practically every relevant
Unfortunately for mutual fund sponsors and, more importantly,
investors in their funds, the superiority of passively managed
over many actively managed ETFs is not confined to the energy
sector. Investors wanting to find other examples of mutual fund
failure relative to ETFs need look no further than one of this
year's top-performing sectors: Health care.
Interestingly, truly compelling ETF/mutual fund comparisons
come by way of the
high-flying biotech sector
. After the four major biotech ETFs hit new all-time highs last
Friday, we became curious regarding how these ETFs stack up
against equivalent mutual funds.
Finding the mutual funds was not hard. In early 2012, one
source featured a list of
the top-performing health care funds
of which a few were biotech funds. Unfortunately, that source
made the mistake of not clarifying between mutual funds and ETFs.
Another source did investors an even greater disservice by
mentioning just two
high-fee biotech mutual funds
So this is what investors would have been treated to with the
Guggenheim Biotechnology mutual fund - Investor Class (
): A year-to-date return of 26.5 percent and a one-year return of
44.8 percent as of April 19,
according to Guggenheim data
It is hard to argue with that, but indeed investors could be
doing better with at least one biotech ETF. In the essence of
making the comparison as fair as possible, we looked at the
iShares Nasdaq Biotechnology Index Fund (NASDAQ:
) against the Guggenheim Biotechnology mutual fund. One reason
for this comparison is that the ETF and mutual fund have
comparable top-10 holdings (kudos to Guggenheim for updating
theirs as of April 19, something not all mutual funds
Additionally, both IBB and the mutual funds allocate close to
30 percent of their respective weights to biotech's big four -
), Biogen (NASDAQ:
), Celgene (NASDAQ:
) and Gilead Sciences (NASDAQ:
IBB was also our ETF pick not because it is the largest
biotech ETF by assets (it is with $2.88 billion), but because
with an expense ratio of 0.48 percent, it is more expensive than
rivals such as the SPDR S&P Biotech ETF (NYSE:
) and the Market Vectors Biotech ETF (NYSE:
). In other words, we were trying to give some advantage to the
mutual fund in terms of fees.
For its part, IBB has slightly under-performed the Guggenheim
Biotechnology mutual fund this year with a gain of 25.8 percent.
Over the past year, however, IBB nudges past the mutual fund with
a gain of 44.9 percent. Round up the performances of IBB and the
mutual fund to say both are up 45 percent over the past 12 months
and investors may wonder what is the difference. Oh, just 78
basis points in fees. As in the mutual fund charges 1.36 percent
per year. To be fair, we could not find evidence of pesky loads
the Guggenheim web site
Still, if the current performances of IBB and the mutual fund
remain constant for the rest of this year, investors opting for
the mutual fund will pay 78 basis points more for 70 basis points
in additional returns. In other words, they will not come out
ahead with the mutual fund.
Remember, we tried to be somewhat fair in this comparison by
using IBB. Investors looking for a biotech ETF that represents a
great value over plenty of comparable mutual funds ought to try
the aforementioned Market Vectors Biotech ETF. That ETF is up
nearly 65 percent in the past year and features annual fees of
just 0.35 percent.
For more on ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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