Hulbert Pooh Poohs ETF Newsletters

A reader left a detailed question asking about Mark Hulbert's comments that wide bid ask spreads often cause ETF newsletters to lag newsletters that tout OEFs. Hulbert also said "If you trade only five times a year you end up with fees that exceed even the most expensive mutual funds."

Before I get into this let me say two things; first, I am not a big believer of trading in and out of various stocks and funds based on a newsletter with a short term focus, even if the past results are excellent the risk is still high and second I have to assume Hulbert is a very smart guy, certainly smarter than me.

There are a couple things here that don't quite add up or better put seem difficult to quantify.

First lets look at the spread issue. One of the ETF mentioned in the article was PowerShares Retail ETF (PMR). At the close on Monday it was $18.50 by $18.59 with the last trade on the primary at $18.53. The spread is wide, yes. If you saw that quote would you try a limit order somewhere in the middle? The Hulbert comment, as I read it, implies you can only get an execution at the ask to buy or the bid to sell. There is no way to know whether that is true or not. The last trade was $18.53, in the middle. In fact all 45,000 shares traded on all markets on Monday were in between the bid ask spread. Bloomberg terminals have a function called Trade Summary Matrix that has this information and a quick call to Schwab got me the info. Keep in mind I picked PMR at random because it was mentioned in the article.

Any attempt to quantify the disadvantage of a wide spread is very unlikely to be accurate. This not to say wide spreads aren't a problem, I just don't see how it can be quantified and if it can't be quantified I'm not sure how to hold it against anyone's results.

I am also unclear on the commission obstacle. Does anyone pay more that $12.95 per trade anymore? Per the article Hulbert says "if you trade only five times a year you end up with fees that exceed even the most expensive mutual funds." Five trades at $12.95 adds up to $64.75 per year. Generally speaking 0.60% makes for an expensive ETF, but there are a few that are more expensive.

An investor with $30,000 (I am picking a small number on purpose) in OEFs that average 1% (I think this is on the low side for OEFs?) in fees would pay $300 for the year. If that same investor made ten ETF trades (as opposed to the five cited by Hulbert) with an average of 0.60% in fees plus $129.50 in commission his total outlay would be $309.50 for the year. The extra $9.50 works out to an almost immeasurable bogey.

Let me state again I am not a fan of following newsletters for short term trading but I am not sure I can see problems outside of risk. I would think that Hulbert's findings of ETF newsletters lagging would be more about process and narrower choices than about spreads and commissions.

I had a few comments left on the Teresa Lo commentary. Thanks for the kind words and the humor. I was not, by any means, looking for a validation of what I do here. There is enough buffoonery (love that word) in the blogosphere, mainstream and the sellside that we should all be wary of. There are also plenty of very smart people from all three providing great content.

I think your success as a do-it-yourselfer will mean you take in content from all three but also learn who can help you and what you do and who cannot.