Exchange Traded Funds (ETFs) 101. Lesson 2

Exchange Traded Funds (ETFs) 101. Lesson 2

| September 14, 2017

Years ago, while studying for my Chartered Financial Analyst (CFA) designation, I read material on how many stocks you should own to be diversified. Remarkably, my study material showed that you only needed 18-24 stocks. Further, the material stated that once you owned beyond 30 stocks there was very little marginal advantage to adding more stocks.

The Fidelity® Contrafund® Fund (FCNTX) has 309 holdings, according to Morningstar. What does this excessive diversification mean? It means that, as more stocks are added, they bring less and less value and the fund looks more and more like an index. The question for an active fund like this is, "How much value are your 31st to 309th best ideas going to bring?"

If you go to and enter the symbol (FCNTX) for this fund and proceed to the Performance tab, and find the Compare button, enter in the symbol (IWF), for the I-Shares Russell 1000 ETF, which is the same category as the Contrafund® Fund. Then, click on Expanded View.

The expanded view comparison reveals that over the last 15 years the edge goes to the Contrafund® Fund, but over the last 10 years, the ETF outperforms. Given this lack of consistent outperformance from the Contrafund® Fund to the ETF in the same category, you should question if paying the additional fee (0.68% for FCNTX verses 0.20% for IWF, according to Morningstar) is worth it.

When doing this type of performance comparison, also note that if one specific year shows a remarkable difference, in this case, the Contrafund® Fund had a big outperformance in 2007 (19.7% vs 11.4%). Without this one-year major difference the fund may not have outperformed the ETF. In fact, a comparison of year-by-year performance of our two investments shows no consistent outperformance to the fund over the ETF. Unless 2007 is repeatable, which has not occurred since, my selection would be to invest in the lower cost ETF.

If you have questions about your investments, contact me:

Michael A. Poland, CFA®, 231.720.0743

photo by:  ©  8vfand | Dreamstime  ETF