New Managed ETFs Try to Beat the Market

If managers can't beat their markets, why pay them to lose? If you are working with a broker, you would be better off with a lower-cost, passively managed index ETF such as the PowerShares QQQ or an SPDR.

If you make your own investment decisions, this same logic says you would be smarter to stick with index funds. For a single lump sum that you will hold for years, an index ETF would be the smart choice -- for example, Vanguard Total Stock Market ETF. You will pay a tad less, even after counting the cost of the brokerage commission.

If you are making regular investments, however, the ETF's brokerage fees would mount up. You should look instead at a traditional no-load index fund.

ETFs have a special tax angle that attracts some investors. For technical reasons, they can often let taxable long- and short-term capital gains build up in the fund, without distributing them to investors. You aren't taxed until you sell. By contrast, open-end funds may distribute net taxable capital gains at year-end, even though you didn't sell your shares.

Sometimes, however, ETFs do hand out taxable gains, to their investors' chagrin. Last year, 98 of them -- 18 percent of the marketplace -- made distributions, according to Morningstar, which tracks fund returns. George Sauter, Vanguard's chief investment officer, says actively managed ETFs, in particular, are apt to distribute gains. Standard & Poor's index funds rarely do.

A final point: If you buy ETFs, stick with the big ones or those with the potential to be big. Funds that don't attract enough assets close. Claymore Securities, for example, last year shut down 11 funds that didn't grow large enough to be popular. The securities were sold, expenses deducted, and the net proceeds distributed to the shareholders. That's not how anyone wants an investment to end.

Alexis Leondis in New York contributed to this column. Jane Bryant Quinn, author of "Smart and Simple Financial Strategies for Busy People," is a Bloomberg News columnist.