What's New

Tougher Tax Times Ahead for Mutual Fund Investors

Subprime Loan Trouble Can Hurt Mutual Funds

If the formerly red-hot real estate market really tanks, it could drag the entire economy and stock market down with it. The Federal Reserve may even have to lower interest rates if the housing market crumbles in an effort to try to let the air out of the bubble slowly.

In an article for FOX News, MAXfunds co-founder Jonas Ferris focuses in on the core problem in the lending market. Surprise, its not predatory lenders.

Now that the real estate market has stopped its meteoric rise, the questionable loan practices and buyers' logic that was once the foundation of the late stages of the boom is starting to crack. Double-digit home price gains year-after-year hid a whole bunch of mistakes.

Home buyers and lenders were both duped into the belief that home prices always go up, so putting very little money down and "buying as much home as you could possibly afford" is always a sound investment strategy, regardless of the entry price."

Your mutual fund portfolio could take a hit when home prices fall. While most of the damage would be to real estate sector funds that invest in companies that could see their businesses sink if a glut of foreclosed homes hit the market – funds like Fidelity Real Estate Investors (FRESX), Third Avenue Real Estate Value (TAREX), T. Rowe Price Real Estate Fund (TRREX), American Century Real Estate Inv (REACX) - mutual funds that only own REITs (Real Estate Investment Trusts – primarily companies that operate properties for rental income) like Vanguard REIT Index (VGSIX) would also suffer.

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Advantage Mutual Funds

04/17/07 -

MAXadvisor Powerfund Portfolios Update

04/16/07 - Powerfund Portfolios

March 2007 performance review

04/16/07 - Powerfund Portfolios Performance Review

The Conservative Portfolio climbed 0.46% in March.The market has shrugged off February's sharp drop as though it were just a moment of baseless anxiety. We’re not in the camp that thinks that all systems are go and the real estate slowdown is only going to have minimal repercussions on the economy. We’d be more enthusiastic if stocks were lower – or if fund investors were less optimistic.

Unusual Fund Mergers at Fidelity

04/15/07 - Fidelity

Bond ETF War Heats Up – First Junk Bond ETF Starts Trading

04/12/07 - ETFs

New Vanguard Bond ETFs Bad Now, Better Later

04/11/07 - ETFs

ETFs are popping up all over, but until now not many have invested in bonds. While some famous rich person once said, "gentlemen prefer bonds", ETF investors clearly do not. While Vanguard was a little late to the exchange traded fund game, in recent years they have put the pedal to the metal in ETF launches. Now Vanguard is launching four new bond ETFs:

Vanguard Total Bond Market ETF (BND) - Benchmark: Lehman Brothers Aggregate Bond Index
Vanguard Short-Term Bond ETF (BSV) - Benchmark: Lehman Brothers 1–5 Year Government/Credit Index
Vanguard Intermediate-Term Bond ETF (BIV) - Benchmark: Lehman Brothers 5–10 Year Government/Credit Index
Vanguard Long-Term Bond ETF (BLV) - Benchmark: Lehman Brothers Long Government/Credit Index

The benefit of the four new Vanguard ETFs is lower fees – 0.11% compared to the 0.15% - 0.20% cost of the few other bond ETFs. Expenses in bond investing are a big deal as bond yields are low today – the less taken out of your coupon payments, the better. Until trading volumes pick up, investors who don't buy and hold may get a better total price with iShares as thinly traded ETFs tend to cost more to buy and sell.

Vanguard claims, “By operating as share classes of existing funds (rather than as stand-alone funds or unit investment trusts), Vanguard bond ETFs will be able to provide lower expense ratios and broader diversification among issues and issuers than competing products can, resulting in greater credit replication and the potential for tighter benchmark tracking.” In practice, early investors are getting a raw deal.

As of a little after 1PM on April 11th, 2007, the market price for the iShares Lehman Aggregate Fund (AGG) is up 0.19%. The new Vanguard fund based on the same benchmark, Vanguard Total Bond Market ETF (BND), is DOWN 0.15%. AGG has traded 243,000 shares compared to BND’s 14,000.

Why the performance gap? Lack of liquidity means trouble arbitraging the fund with the underlying fund holdings - the mechanism that keeps ETF’s market price close to the NAV. Those who bought BND near the market close yesterday paid a roughly 0.50% premium to NAV, while buyers of AGG paid a 0.20% premium. That’s three years worth of "savings" in fund expenses down the tubes.

Until this problem works itself out, stay away. Or consider Vanguard Total Bond Index (VBMFX). Sure its 0.20% a year, but you buy and sell at NAV commission free (at Vanguard).

Other bond ETFs:

iShares iBoxx $ Investment Grade Co (LQD)
iShares Lehman 7-10Yr Treasury Bond (IEF)
iShares Lehman Aggregate Fund (AGG)
iShares Lehman Credit Bond Fund (CFT)
iShares Lehman Intermediate Credit Bond Fund (CIU)
iShares Lehman 1-3 Year Credit Bond Fund (CSJ)
iShares Lehman Government/Credit Bond Fund (GBF)
iShares Lehman Intermediate Government/Credit Bond Fund (GVI)
iShares Lehman 3-7 Year Treasury Bond Fund (IEI)
iShares Lehman MBS Fixed-Rate Bond Fund (MBB)
iShares Lehman Short Treasury Bond Fund (SHV)
iShares Lehman 10-20 Year Treasury Bond Fund (TLH)

Info at Vanguard.com

Brokers to be Held Accountable for Bad Advice

04/11/07 - Professional Advice

Six Mutual Fund Tax Tips

04/10/07 - Mutual Funds and Taxes

Morningstar lists six ways you can make your mutual fund portfolio more tax efficient by minimizing your taxable fund distributions. Tax-efficient funds are those that make very few or relatively small taxable payments to shareholders; some funds try to keep trading activity low (minimizing realized gains which have to be distributed), some watch the way they buy and sell securities in an effort to minimize the tax burden to their shareholders.

Invest in Tax-Managed Funds - The managers of tax managed funds take special care to keep taxable distributions to a minimum. They generally don't do much trading, and attempt to "sell losing stocks to offset winners elsewhere in the portfolio." Tax managed funds mentioned in the article: Vanguard Tax-Managed Growth & Income (VTGIX), Vanguard Tax-Managed Balanced (VTMFX), and Eaton Vance Tax-Mgd Value A (EATVX).
Look for Closet Tax-Managed Funds - Many funds, such as Oakmark Fund (OAKMX) and Third Avenue Value Fund (TAVFX) don't officially call themselves tax efficient, but have managers that try to keep taxes low.
Don't Forget about Index Funds - Index funds track indexes such as the S&P 500, and the people that decide which stocks are included in such indexes don't add or remove stocks from them very often. Because these funds tend to have low turnover, they are generally very tax efficient.
Think about ETFs - Most ETFs track indexes, just like index funds do, and hence have low turnover. Low turnover usually equals high tax efficiency. In addition, ETFs unique structure minimizes taxable gains that have to be distributed to shareholders.
Make Other Investors' Losses Your Gain - Mutual funds that have had particularly bad performance periods (think tech funds in 2002), can 'carry forward' those losses and offset gains for years to come. This is one we particularly like because it also means you are probably making a contrarian investment – investing where others have just lost money.
Houseclean Your Own Portfolio - If you're planning on dumping a fund that has posted a loss, selling before December 31st will allow you to use the loss as a tax deduction on that year's taxes.

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Of course, the most tax-efficient funds are the ones that stink when you own them, because they never distribute profits (there are none!) and often generate nice tax losses when you sell them.