Revised Model Fund Portfolio: Combining Mutual Funds and ETFs
In the August 2006 AAII Journal, we began a Model ETF Portfolio.
We indicated that it was an experimental portfolio meant for the examination of exchange-traded funds, which were quite new at the time. While ETFs are still relatively new—few have a 10-year history—we feel we can make some judgments and integrate ETFs into an overall fund portfolio.
In this article
- ETFs and Funds
- Model Fund Portfolio: Selection Rationale
- The Modified Portfolio
- No International Diversification
- Components of the New Model Fund Portfolio
- Funds Sold
- The Market Ahead
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While it is handy to keep traditional mutual funds, ETFs and closed-end funds separate when listing them or reporting on them, an effective fund portfolio should combine them to take advantage of the strengths of each. That is exactly what we have done by making major changes to our Model Fund Portfolio.
Closed-end funds are mutual funds with a fixed number of shares that can only be purchased or sold through exchanges. The share price may deviate from the net asset value. With a traditional mutual fund, investors buy and sell an unlimited or open number of shares once per day, directly through the fund at the NAV. Exchange-traded funds trade on exchanges like closed-end funds, but the fund also buys and sells shares directly with authorized participants to help keep the ETF market price close to the NAV.
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