Sunday's New York Times had an article titled "The Low-Cost Power of Naked Investment Strategies."

Okay, I made that up.

The real title was "The Low-Cost Power of Exchange-Traded Funds." The majority of exchange-traded funds employ rule-based methods, which I of course call "naked strategies." Most are not managed the traditional way using an investment manager's judgment, which is used by the majority of open-ended mutual funds.

The article suggests that assets in exchange-traded funds are growing -- practically eating traditional mutual fund managers for lunch! The Times points out that these kinds of funds have two big advantages over traditional funds. 1. They are less expensive. 2. They are more "tax efficient."

Exchange-traded funds offer a great opportunity for small investors to take advantage of the benefits of naked investing. Affluent investors, on the other hand, should use separately managed accounts. As I explain in Chapter 12 of The Naked Portfolio Manager, rules-based investing is both more economical than traditional mutual funds, and much more tax efficient that exchange-traded funds. This is because when you use an index fund or exchange-traded fund, you have much less flexibility about how and when to take your gains and losses. With a separately managed account, you have a host of tax minimization strategies that are not available to investors who use this fund. For more information, see page 109 and 110 of my book.

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Labels: exchange-traded funds, index funds, tax minimization, taxes