Duplicating a fund: Just how dumb would it be…

[beanmaestro]

So, my wife asked me to look into green energy stocks for 3-4 year timeframe money, on the theory that these should benefit from the US carbon regulations growing, and conventional power costs escalating. This is only a small portion of our portfolio, so don’t worry about diversification here.

Looking through assorted funds, it appears that the New Alternatives Fund (NALFX), which fits the sector of interest, has outperformed its competition (and the S&P) for ten years, and avoids feel-good but poorly-run businesses, would be a good choice. The catch is that it has 4-5% front load and 1.2% fees, whereas I’ve been very happy with my cheap Vanguard funds. So I cruise over to its website and find its list of investments here: http://www.newalternativesfund.com/returns/returns_list.html

Now the question: Just how stupid is it to research the top 10 holdings, pick 5, buy $4k of each, and plan to hold them for a few years? I may not do as well as the fund, but I can trail by 2.5% a year and be ahead on fees. And I can always use their quarterly update of holdings as a reality check.

Thoughts?

[liver]

why not just buy The WilderHill Clean Energy Index ETF ticker is PBW. It is both time and tax efficient…

[liver]

why not just buy The WilderHill Clean Energy Index ETF ticker is PBW. It is both time and tax efficient…

[meadandale]

The problem, as I see it, is that there are alot of small players in that fund. Most are only a few percentage points of the fund. Just because they are in the top ten in holding, doesn’t mean that they are going to have the best gains for the fund. For instance, suppose the top ten all are represented at 3% or greater in the fund. It could be that one that is sitting at 0.5-2.0% is significantly outperforming any of those above 3%.

Remember, stocks constituting a fund at higher percentages tends to be a growth stocks, not a value stocks They provide stability at the expense of explosive growth. The riskier stocks in the fund are represented at lower percentages due to their risk but their returns MAY eclipse the conservative picks.

If you are putting this investment in the category of ‘speculative’, I’d just do some research on this sector and try and find some potential winners regardless of the percentage that they are represented in this fund.

A 1.2% fee is not EXCESSIVE (although I tend to avoid funds much above this level like the plague) but the load is. There is absolutely no reason ever to pay a load.

FWIW, my core portfolio tends to be in index funds with no load and VERY low fees (0.10% in many cases). If you’ve read any Bogle, he spends alot of time beating this point home–a fund has to significantly beat the market to just break even with high fees.

[meadandale]

The problem, as I see it, is that there are alot of small players in that fund. Most are only a few percentage points of the fund. Just because they are in the top ten in holding, doesn’t mean that they are going to have the best gains for the fund. For instance, suppose the top ten all are represented at 3% or greater in the fund. It could be that one that is sitting at 0.5-2.0% is significantly outperforming any of those above 3%.

Remember, stocks constituting a fund at higher percentages tends to be a growth stocks, not a value stocks They provide stability at the expense of explosive growth. The riskier stocks in the fund are represented at lower percentages due to their risk but their returns MAY eclipse the conservative picks.

If you are putting this investment in the category of ‘speculative’, I’d just do some research on this sector and try and find some potential winners regardless of the percentage that they are represented in this fund.

A 1.2% fee is not EXCESSIVE (although I tend to avoid funds much above this level like the plague) but the load is. There is absolutely no reason ever to pay a load.

FWIW, my core portfolio tends to be in index funds with no load and VERY low fees (0.10% in many cases). If you’ve read any Bogle, he spends alot of time beating this point home–a fund has to significantly beat the market to just break even with high fees.

[HereWeGo]

bean-
Actually, if you go to money.msn.com, you can get the top 25 holdings of a fund. I wouldn’t try to match, but it’s nice to have the extra bit of research before buying.

[HereWeGo]

bean-
Actually, if you go to money.msn.com, you can get the top 25 holdings of a fund. I wouldn’t try to match, but it’s nice to have the extra bit of research before buying.

[beanmaestro]

NALFX is nice enough to actually list all of the components, but with ~$20k it doesn’t make sense to buy more than 4 or 5.

I’d stayed away from the Wilder ETF because I had read that it invests in a lot of feel-good startup companies that don’t really go anywhere, rather than high-volume blue-collar producers.

[beanmaestro]

NALFX is nice enough to actually list all of the components, but with ~$20k it doesn’t make sense to buy more than 4 or 5.

I’d stayed away from the Wilder ETF because I had read that it invests in a lot of feel-good startup companies that don’t really go anywhere, rather than high-volume blue-collar producers.

[HereWeGo]

If you’re willing to take on risk and throw in another 5K, you could head over to Direxion. Those fellas are AGGRESSIVE.

[HereWeGo]

If you’re willing to take on risk and throw in another 5K, you could head over to Direxion. Those fellas are AGGRESSIVE.

[Author]

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