Why You Should Try to Avoid Trendy Funds

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Seeking to attract new investors, fund companies have brought out numerous specialized choices. The fledgling funds include Claymore S&P Global Water and T. Rowe Price Africa and Middle East.


This is not the first time the industry has introduced narrowly focused funds. During the bull market in the 1990s, dozens of Internet choices appeared. In the 1950s, investors could buy the Television Electronics Fund.


Most of the latest generation of specialized funds will undoubtedly disappear. Recently Claymore Secur-ities announced that it was liquidating 11 of its new funds, including Claymore/Clear Global Vaccine Index and Claymore/KLD Sudan Free Large Cap Core.


But while they exist, the narrow funds can be dangerous for in-vestors. The funds typically appear just as market trends are peaking. Investors who jump aboard often buy shares just before they collapse.


Anyone who is considering a new fund should make a special effort to research the offering thoroughly before investing, says Jeffrey Ptak, an analyst for fund tracker Morningstar. “Successful funds tend to attract assets,” says Ptak. “If you see a fund with an odd name and a few million dollars in assets, then you have to ask yourself why other investors have not discovered it yet.”


Ptak cautions that some of the narrow funds have misleading names. For example, First Trust ISE Water Index holds a company that makes defense electronics as well as instruments to measure water. “If you want to invest in specific sectors you have to examine the fund's holdings and make sure of what you're getting,” says Ptak.


Some advisors are wary of the new funds simply because they are untested. “We focus our efforts on funds that hold blue-chip stocks or assets that have track records going back decades,” says Thomas Mench, a financial advisor in Cincinnati. “It's not clear that funds focused on narrow markets will add any value to what we already hold.”


Some advisors argue that a few of the specialized funds could be worth considering. Several funds invest in commodities, which can help balance portfolios because prices of products such as copper and corn often rise when stocks are falling. New choices include PowerShares DB Base Metals and PowerShares DB Agriculture.


“There are now some new funds that make it easy to take advantage of the growing demand around the world for commodities,” says Tom Lydon, president of Global Trends Investments, a financial advisor in Newport Beach, Calif.


To be sure, the commodity funds can be risky. But by investing in a few well-chosen funds, investors may make their portfolios better able to withstand unpredictable market downturns.

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