I've written before about mutual funds and "window dressing." When funds report their holdings (usually quarterly), they do so based on what they own on one specific day. If they want to look like they've been holding some recent big winners, they might buy some shares just before the day on which their holdings will be reported. They might also make sure to sell any dogs before that day.
Kevin Price tackled window dressing the other day at seekingalpha.com. He noted that many managed mutual funds seem to have been quietly buying lots of broad-market exchange-traded funds (ETFs), and holding them between reporting dates. This may seem innocuous, as it does deliver market-matching returns to shareholders, but remember that actively managed mutual funds should be in the business of aiming to beat the market. Such funds also typically charge much higher fees than index funds and ETFs.
Of course, some ETFs do very well. The iShares S&P Global Telecommunications
As Bank of New York Mellon
This is a good reminder that when we study mutual funds, we should be vigilant. Years ago, New York Times writer Richard Oppel suggested a method for ferreting out closet indexers: "If a fund has an R-squared of, say, 90, that means that 90% of the fund's movement can be explained by movements in the component stocks of the index." (You can find R-squared data at Morningstar.com, in the "Risk Measures" section of a fund's report.)
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Sprint Nextel is a Motley Fool Inside Value recommendation. Try our investing services free for 30 days. The Motley Fool is Fools writing for Fools.