Updated Wednesday, January 2, 2013 at 07:39 PM
Q: I continue to read where more money is going into exchange-traded funds while less and less is going into traditional mutual funds.
I have a large percentage of my portfolio invested in mutual funds. Should I be worried that ETFs will continue to grow while mutual funds decline? Should I consider moving some of my money from standard mutual funds into ETFs?
A: Exchange-traded funds should not be a cause for concern. As with mutual funds, there are many exchange-traded funds that have no reason to exist because they are too speculative, too expensive or both.
If you are thinking about changing your investments to lower expenses, then you should start considering moving some of your mutual fund investments into the largest, most liquid and lowest-cost exchange-traded funds.
You can find a list of the largest ETFs by assets at this website: etfdb.com/compare/market-cap.
Q: I would like to know how best to invest in silver: Would it be by depository, ETFs or silver mining stocks?
A: The answer depends on your reason for investing. If you believe that silver, as a commodity, will rise in value relative to other tradable investments, then you should invest in a silver ETF, a company that produces silver or some combination of both. This will be a low-cost and liquid form of investing.
If you believe that owning silver will be good because paper money will be a future source of toilet paper, then you should invest in physical silver, preferably in small amounts that can be used as a substitute for paper money. In other words, think silver coins.
Q: I know what you think about variable annuities in general. But what about the case where the retiree and spouse have a pension, Social Security and a sizable required minimum distribution (RMD) at age 72, with significant holdings of municipal bonds and a marginal tax rate of 25 percent?
He and his wife are near the threshold for a modified adjusted gross income (MAGI) of $170,000. Furthermore, the retirees have no need for the RMD money, either now or in the foreseeable future.
So do the retirees put the RMD money into the variable annuity for tax deferral, or put it into a taxable account? If taxable, would something like the Vanguard Mid Cap index be a good taxable investment to be in?
A: If the primary issue is controlling your taxable income — if only to avoid the uptick in your Medicare premiums that occurs at a MAGI of $170,000 — then you might consider a variable annuity that has very low costs.
The cost of the Vanguard VA is about 60 basis points, all-in. This gets you tax deferral and the related control of distributions. Fidelity also offers a variable annuity, but its costs are somewhat higher. Both are materially lower cost than the vast majority of offerings.
The alternative is an index fund, as you suggest, but it will produce some income and uncertain capital-gains realizations. More important, the quest to reduce taxable income will force you to invest more aggressively than you might want. With the VA you can choose a balanced portfolio and have less risk.
The total cost of mortality and administrative expenses in the Vanguard product is 0.29 percent, with an additional 0.3 percent for the cost of the balanced fund. So the total cost is 0.59 percent.
Copyright, 2013, Universal Press Syndicate