Choose sufficiently mature mutual funds and ETFs Investing in more mature equity and bond mutual funds and exhanged-traded funds (ETFs) allows you to evaluate the historical consistency of a fund’s record.
On average, the future portfolio returns of more mature funds are probably no more predictable than for very young funds with a similar style or strategy. However, the record of accomplishment of a more mature fund can provide more confidence in its commitment to its strategy and in its ability to remain in business. While there is no guarantee that an older mutual fund will not fail, you have a better chance to avoid involuntary participation in the frenetic birth and death process of many infant funds.
Very young funds simply lack records of accomplishment. Thus, very young funds are more likely to put you in the position of being an experimental guinea pig.
Concerning screening criteria, simply set a minimum age for funds you are willing to have in your portfolio. Three years should be adequate, and there is probably no reason to have a higher minimum. The point is simply to avoid allowing the industry to experiment with your money.
Keep in mind that the financial securities industry is very clever and tries very hard to attract your investment dollars. Data from Lipper, Inc. indicates that 1,460 new mutual funds were started in 2003, 2,309 in 2002, and 2,392 in 2001.1 The actual number of truly new and distinct funds is smaller, because Lipper counts different share classes as separate funds. Differences between share classes have nothing to do with the management of a fund’s portfolio. Instead, these share class differences are due to structure of the sales compensation paid to the advisor who induces you to invest in a fund. Different share classes simply assess higher or lower front-end and back-end sales load charges and higher or lower annual expense ratios.
Mutual fund and ETF companies might argue that they are trying to offer innovative new funds to meet evolving investor demands. A true innovation motive is quite unlikely, because thousands of funds of all types already exist. In 2005, there were almost as many different domestic equity mutual funds, as there were domestic publicly traded companies (U.S. firms that are traded on public exchanges, excluding OTC penny stocks).
A more cynical view of this frenetic fund birthing process is that mutual fund and ETF companies [...]