NEW YORK (CNNfn) - The Wal-Mart revolution has finally made it to the convoluted world of mutual funds.|
So if you like to buy car batteries, frozen yogurt and shaving cream in one store, you might want to consider a fund supermarket that offers thousands of no-load mutual funds from different families at no extra cost.
In some cases you'll even be able to get your feet in the door at a new fund, or buy a fund that would otherwise carry a steep minimum investment. Best of all, you'll get one statement in the mail with your performance and tax data.
"If you want to spread your money around different fund groups this is a convenient way to do it," said Sheldon Jacobs, editor of the investment newsletter No-Load Fund Investor. "And if you want to move money from one fund into another, it's just one phone call."
How it works
You'll find most fund supermarkets offer a certain number of their own funds and other funds with no transaction fee, sometimes called N.T.F. in fund jargon.
They also may offer funds from other families for a transaction fee that can vary. At Schwab, you can buy other funds for $29 to $155, depending on the type of fund and whether you buy it over the phone or on the Web. At Fidelity's FundsNetwork Xchange, you'll pay $75 to $250, depending on whether you buy over the Web or get financial assistance. Vanguard's FundAccess charges a flat fee of $35.
Fund companies pay the supermarkets a fee to feature their products that can range from 0.25 percent to 0.35 percent, Jacobs said.
Schwab pioneered the idea when it started its Schwab Mutual Fund Marketplace and OneSource program, but there are many other alternatives these days, according to Cerulli Associates, a Boston researcher. Fidelity offers more than 4,000 funds on its supermarket, and you can also fund shop at discount brokerages such as Ameritrade, DLJ Direct and E*Trade, and Wall Street powerhouses such as Merrill Lynch.
"Mutual fund supermarkets have gone in the past seven years from being merely an interesting innovation ... to being one of the most powerful distribution platforms for mutual funds," Cerulli found in a recent study.
Some fund supermarkets are easier to navigate, like Fidelity's, said Russ Kinnel, an analyst at Morningstar. He said other supermarkets make you work harder, like Vanguard. Vanguard, the low-cost indexing giant, got into the business reluctantly. It was a chief difference between outgoing Vanguard chief John Bogle and the current chairman, John Brennan. Bogle worried that supermarkets encourage short-term investors and market-timers.
Joseph Rizello, principal of Vanguard Brokerage Services, argued that the Vanguard supermarket has greatly expanded its offerings in the past 18 months.
"I disagree [that] it's not easy to use," Rizello said. But he said Vanguard has one of the most stringent redemption policies among supermarkets to discourage short-term trading. You'll pay a 1 percent redemption fee if you sell your shares in less than a year.
Another thing to consider is that supermarkets offer different funds and services, so you should do your homework before you start loading up the shopping cart, Kinnel said.
"If you're choosing between supermarkets, look for what services you want, what reports you want, whether you want retirement tools, or detailed reports on taxes," Kinnel said. "The point of a supermarket is convenience. If it's not convenient, then it defeats the purpose."
A doorway into special funds
Kinnel said fund junkies might not care about the convenience of having one statement, but they might appreciate a chance to get into funds that otherwise carry a steep minimum initial investment.
For example, Weitz Value and Brandywine Fund have minimum investments of $25,000. But you can get in the door through a supermarket for as little as $2,500, Kinnel said.
At Fidelity, you can get into Loomis Sayles Bond Fund and six Firsthand Funds, which all carry much higher minimums, for just $2,500, said Matt Sadler, senior vice president at Fidelity FundsNetwork Xchange.
Supermarkets may also offer some institutional funds that have lower manager expenses than a traditional retail fund, Kinnel said. Buying an institutional fund makes sense especially for mid- and small-cap growth funds that get swamped with assets when they're doing well, he said. The bigger a fund gets, the harder it is to keep delivering strong returns.
Likewise, a supermarket gives you a chance to buy a new fund that is looking for investors through a subscription period. In these cases, you'll be able to buy shares for one price before the manager starts trading.
Most recently, investors had a chance to buy $10 shares of Janus Strategic Value Fund through Schwab in a special month-long subscription period. The fund, a foray into value investing by the well-known growth shop, took in more than $1 billion in assets during the period. Of that amount, $388 million came via Schwab's supermarket, Schwab said. Fidelity is also offering the Janus fund.
"Customers really liked the idea of getting in on the ground floor of a new fund, especially funds that are managed by companies that have strong track records and good brands," said Jeff Lyons, executive vice president of mutual funds at Schwab.
Schwab started its subscription program in 1995 with Janus Olympus Fund, and has also introduced Janus Global Technology and Janus Life Sciences Fund, spokesmen for the two companies said.
"Schwab has been a great partner to help distribute the product," said Janus spokeswoman Shelley Grice.
Schwab also took in $150 million for Baron iOpportunity Fund and $65 million for Hambrecht & Quist's IPO Emerging Company Fund.
All that competition may be good for consumers, too. For example, online Web Street Securities recently said it was eliminating commissions on purchases, sales and exchanges for 4,000 funds it offers in its Mutual Fund SuperSite.
"Certainly there's a lot of competition," said Lyons of Schwab. "Just about every big financial services firm offers funds from various fund families."