The Derivative Scare: Fear Mutual Funds

Mutual Fund Chart Caught In The Bark (Washingt...
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All that needs to be said on this subject is ‘Past performance is no indication of future results’.

This misinformation is compounded by the fact that mutual funds also use derivatives. In fact, a recent study presented the top 3 mutual funds in 401(k) plans, all of which use derivatives as underlying investment options. If derivatives should be avoided in retirement plans, buy an ETF of the benchmark index for each mutual fund listed below:

Top 3 Mutual Funds in 401(k) Plans

Source: BrightScope study of over 50,000 plans released 10/3/10

Fund name

Derivatives

Benchmark ETF

American Funds Growth Fund of America (AGTHX)

YES

(VOO) – No Derivatives

Pimco Total Return (PTTAX)

YES

(AGG) – No Derivatives

American Funds EuroPacific Growth Fund (AEPGX)

YES

(VEA) – No Derivatives

There are many mutual funds touting great performance, but is this performance due to juicing the returns with derivative? The use of derivatives adds to performance significantly when the trader is right, however when they are wrong it can be catastrophic.

Please comment or call to discuss how this affects you and your fiduciary responsibilities.

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