Of the 780 new funds brought to the market in the past two years, few are true innovations and many proved to be poor choices, The Wall Street Journal reports.
Five years ago, while the market tanked, many fund companies introduced principal-protection funds that guaranteed investments, plus participation in the market. Trouble was, these funds’ high fees kept them barely in line with bond returns.
Recently, a number of long-short mutual funds have come to the fore, but with widely varying performance.
Exchange-traded funds will continue to be a hot area; in the first 11 months of 2006, 130 new ETFs came to market, and another 225 are in the works for 2007.
For those looking for income, bond funds and dividend-paying stock funds have their drawbacks, which is why some advisers are recommending equity funds that invest in stock options.
More target-date, or lifecycle, funds are also likely to come to market, due to their ease of use. But while they all have similar goals, the composition of their portfolios varies widely—many have large equity or other risky exposure—which is why investors need to take a hard look at such funds.