14 Funds that Are Better than ETFs
These conventional funds offer low costs and tax efficiency without the commissions.
As one of Morningstar's ETF specialists, I've often noted that some conventional mutual funds often stand up quite well to the cost and tax challenges posed by exchange-traded funds. To that assertion readers often respond, "Oh yeah? Name them." It's time for us to put up or shut up.
We acknowledge that ETFs are cheaper and more tax efficient than most traditional mutual funds, but they don't trump them all. In fact, it's fairly easy to find a list of no-load conventional open-end mutual funds in our nine style boxes that can compete with ETFs on costs, tax efficiency, and performance. To find them, we screened for open no-loads with better five-year tax cost ratios and tax-adjusted returns than the average ETF in their categories. We also looked for funds with expense ratios that were, if not as low or lower than rival ETFs, at least lower than three fourths of other no-load offerings in their market-cap ranges. What follows is a list of funds that not only have given ETFs a run for their money, but also should be able to continue to do so because of their managers and strategies. If you buy these funds you may have to give up the vaunted trading flexibility of ETFs, but that doesn't matter as much if you measure your holding periods in years rather than days or months. And the beauty of these funds is that--unlike ETFs--you can buy them without a brokerage commission.
Several index funds made the cut. Fidelity Spartan Total Market Index (FSTMX) has a strong record of tax efficiency and an ETF-like expense ratio of 0.10%. Several Vanguard index funds, including Vanguard's Total Stock Market Index (VTSMX), Growth Index (VIGRX), FTSE Social Index (VFTNX), Mid Cap Growth (VMGRX), and Extended Market Index (VEXMX) funds all overcame slightly higher expense ratios than some of their ETF peers to post better after-tax returns and tax cost ratios than the typical ETF in their respective categories. Small growth ETFs, such as iShares Russell 2000 Growth Index (IWO) and iShares S&P SmallCap 600 Growth (IJT), also have shown no cost or tax advantage over Vanguard Small Cap Growth Index's (VISGX).
Dan Culloton has a position in the following securities mentioned above: SLADX. Find out about Morningstar’s editorial policies.