Transcripts

"Of Mutual Interest"-John Waggoner, Mutual Fund Columnist at "U.S.A. Today"

SUSIE GHARIB: In tonight's "Of Mutual Interest," why newer isn't always better. Here's John Waggoner, mutual fund columnist at "U.S.A. Today."

JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: The leaves are turning. The geese are flying south and visions of new mutual funds are dancing in fund companies' heads. Mmm, you can almost smell investors' money going up in smoke. The mutual fund industry offers nearly 8,000 funds, which invest in stocks, bonds and money market securities. You can choose from about 5,000 stock funds alone. Nevertheless, the industry has been merrily creating new funds. Just last Friday, for example, ishares launched three new small company exchange-traded funds. Monday, an exchange-traded fund that bets against the price of oil made its debut. What's so bad about new funds? Well, for one thing, they have no record. With so many funds to choose from, why pick one that has no track record? For another thing, they tend to be faddish and that's a bad thing. Fund companies make their money by charging a fee equal to a percentage of the fund's assets. The bigger the fund, the more money they make. Not surprisingly, fund companies roll out new funds that specialize in hot market sectors -- oil, for example -- or small company stocks. Hot sectors get the most money from the investing public. But it takes a while to create a new fund and get permission from the government to sell it to the public. By the time the fund makes its appearance, the hot market trend is starting to cool off. In the worst case, new funds just suck in investors at the worst possible time. One exception to the rule -- new funds with seasoned managers. Every once in a while, a great manager strikes out on his own and starts a new fund company. But most times, the best use for a new fund prospectus is to light the evening fire. I'm John Waggoner.