New kids in the old mutual fund biz, Mutual Funds using ETF’s

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May 8, 2009 11:30am ETF BASIC NEWS

mutualfundA few weeks ago, David Wild of Appleton Group Wealth Management, Inc. visited our offices to explain the nuts and bolts of its mutual fund — the Appleton Group Plus Fund (AGPLX $) — and how it has performed since its launch in 2005. It’s one of just a handful of funds that use exchange traded funds (ETFs) as their main investment vehicles, and given the volatility of ordinary mutual funds these days, they’re worth a long look.

Indeed, Wild’s visit sparked us to evaluate other funds primarily using ETFs, and our research came up with only three others: Ashton/Smart Allocation ETF Fund (ASENX $), Ashton/New Century Absolute Return ETF (ANENX $), and ETF Market Opportunity (ETFOX $). We combed through, Charles Schwab’s mutual fund research and Googled “ETF mutual funds” but only came up with these four. Others may exist, but we couldn’t find them.

Before we go any further, we need to explain the differences between traditional mutual funds, ETFs, and ETF-oriented mutual funds. Traditional mutual funds hold plain old stocks and bonds. They sell their shares to the public and repurchase those same shares from the public. This type of mutual fund is priced at the end of each trading day.

ETFs, or exchange traded funds, are baskets of stocks, bonds, or other investment vehicles that are in the custody of banks. These so-called baskets — holding a specific group of stocks like the S&P 500 — are traded like stocks on the stock exchanges during regular trading hours. Investors don’t own the individual shares within those baskets, but rather the entire baskets via custodial arrangements between the bank and the ETF sponsor.

Now the new wrinkle: A few traditional mutual funds, like the four above, are now investing in ETFs rather than stocks and bonds. In essence, they’ve blended the traditional mutual fund with ETFs. One obvious advantage of this approach is the reduction in specific stock risk; traditional mutual funds can suffer disproportionately if one or more of their stock holdings gets flattened, like Enron or Fannie Mae.

That being the case, the next step for us in evaluating these funds was to look at their investment strategies and their returns.

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