Check out the name of this mutual fund: Tactical Defensive Fund. Sounds like this fund kicks ass, takes names and would be an excellent investment for your money. And it better. The fee for this fund ranges from 1.82% to 2.09%. Ouch. Disappointingly, this fund has lagged the returns of the stock market. This means if you have invested in this fund you not only have been paying a very high fee – you’ve been paying a high fee for poor performance. And it’s no surprise, it has two red flag fund words in its name. Over the years, I’ve noticed that funds with certain words in their names are typically more expensive. Below, I’ll outline the top 10 red flag fund words in a fund’s title that mean it’s probably going to be expensive, provide lackluster returns and is a fund to avoid.
1) Red Flag Fund Word: Tactical
If you see the word “tactical” in a fund’s name, there’s a good chance it’s an expensive fund to avoid. Tactical funds try to mitigate risk and capitalize on potential opportunities in the short term. These are highly managed and active funds. This means that the manager or rather management team for this fund is constantly buying and selling within this fund. There’s a lot of turnover in a fund like this which means it costs extra to pay for all the people who work on this fund and there are a lot of trading and tax implications. I imagine the fund manager for funds like this to be a highly caffeinated, seriously jumpy person who thinks every news story means the end of modern capitalism as we know it!! Sell sell sell go to gold, oh wait, wheat futures are up, buy buy buy!!
The expense ratio on the lower end for these funds is around .75% and on the higher end are 2% or more. On average expect to pay 1 to 1.5% in fees for investing in this fund. Not worth it.
2) Red Flag Fund Word: Strategic
Unlike Tactical funds that try to seize on short term opportunities, strategic funds try to capitalize on opportunities long term. There is less trading going on in these funds but they are still actively managed and making “bets” that some parts of the economy or markets will do better than others. Sometimes they’ll get it right, sometimes they won’t. Regardless you’ll pay around .50% on the low end and 1.5% on the higher end.
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3) Red Flag Fund Word: Hedge
A hedge fund isn’t typically open to mere mortals. Typically, an investor has to be “accredited.” Being accredited means you’re either “skilled” meaning you have a series 7, 65, or 82 license, have a net worth over $1M not including your home’s value, or you earn $200k (single) or $300k (married) a year.
Hedge funds use a lot of complex trades and techniques using leverage, short selling and derivatives to beat the market. Many hedge funds also rely on the decision making of one or a group of top ranking managers. It’s typically why you’d use one hedge fund over the other – because you “believe” the person at the helm “knows” something about the economy, various businesses or whatever and will make profitable investment decisions.
Hedge funds are actively managed funds run by very smart people who can make really risky and costly decisions. One of my favorite hedge fund managers to follow is Bill Ackman. He got the heebie geebies after he bought Netflix stock and lost about $400 million in the process. On average it’ll cost about 1 to 2% in fees to be invested with a hedge fund. PLUS, if hedge funds do better than they anticipated, they’ll take a performance based fee of 10 to 20% of the profits. Good luck.
4) Red Flag Fund Word: Active
When a fund uses the word “active” in its name it’s certainly a red flag that the fund is going to have a lot of money moving around which will cost a lot to manage. I think a lot of funds use the word “active” in the fund names because it makes potential investors think – “Hey, these fund managers are really going to work hard to make sure my money grows”. This is nearly 100% true. The fund managers are going to work really hard, and they’ll try very hard to make your money grow. However, over the long term they probably won’t. 80% of actively managed funds fail to do better than the S&P 500 average in the first year. But, they’ll still charge you on average .50% to 1.5% in fees for their efforts.
5) Red Flag Fund Word: Managed
Managed is kind of a throw-away word when it comes to fund names. Most every fund is managed – even if it’s passively managed. Funds put a lot of thought into their names – a lot of people will make decisions on whether or not to invest in a fund solely based on the fund’s name! I know because I’m guilty of it. Are you?
A lot of these words are like advertising or marketing. Funds want to sound prestigious and fancy. Like they know what they’re doing. A lot of the expense of a fund is in the marketing and advertising for it. Funds have to differentiate themselves and make you feel like they are the best bet for your money to grow. The more a fund needs to advertise and hire managers to actively manage it, the more you’ll pay. On average you’ll pay between .5% to 1.5% for this red flag fund word.
6) Red Flag Fund Words: Micro or Small
When it comes to funds with the word small or micro in their names, it typically means that the fund is investing in businesses that have a market capitalization of $250M to $2B. Sounds like a lot of money – but not on Wall St. Funds that focus on these size companies are betting they’re going to find the next Amazon or NVIDIA in their baskets. This could totally be the case, but more likely you’re going to pay managers a lot of money while they fruitlessly search for the next “big thing.”
Expect on average to pay .75% to 1.5% in fees for these kinds of funds.
7) Red Flag Fund Word: Alternative
If you see the word “Alternative” in a fund name, I want you to be super skeptical. These funds invest in private equity, hedge funds and assets like metals (gold, platinum, copper etc.), cryptocurrencies, currency trading and complicated trades. These funds on average charge between 1% to 2% in fees. But wait! it gets better! These funds can also charge performance based fees just like hedge funds.
8) Red Flag Fund Words: Sector or Defensive
When a fund has the word sector or defense in it, it means the fund managers are betting a specific part of the market will do better than all the rest. “Defense” funds focus on more “stable” sectors such as defense, consumer staples or utilities. Defensive funds want to shield capital from losses.
They could be right, or they could be wrong. What is guaranteed is that you’ll pay a fee for all their efforts, even when they get it wrong. On average these funds will charge around .5% to 1.5% in fees. What’s going to really cost you is if they get things wrong – which is very likely. You’ll pay a fee for their miscalculations and if your investments don’t grow to at least beat inflation.
9) Red Flag Fund Words: Protection/Preservation or Structured
One of the biggest fears of investors is losing money. Fund managers capitalize on this fear by providing funds that will limit the losses investors incur. The catch is investor returns are capped. For example, suppose the fund drops 15% in value. The fund will limit your loss to perhaps just -5% or perhaps will guarantee you a minimum 2% return. In return for this safety net, the fund will limit your gains and keep profits after a certain threshold. For example, say the fund is up 13%, but it’s return threshold is 10%. This means the fund will go up for investors by 10% and the fund will keep the “extra” 3% for itself.
These are highly sophisticated and complex products that use options, derivatives and short selling strategies. Their fees reflect this. On average you’ll find fees on the low end at around .5%, and on the higher end 2% or better. The biggest cost is that there isn’t much growth potential here. Giving up the upside means inflation can erode your money’s power. Inflation can really stall out your ability to grow your money, which is still very important, even in retirement. Tread with caution with these products. A fair question to ask is why not just put money into a CD or directly into a bond instead of one of these products if capital preservation is a true concern?
10) Red Flag Fund Word: Innovation
Innovation funds focus on investing in companies or sectors of the economy that are producing the latest technologies. These are very risky funds in that the technologies being invested in aren’t yet proven, could take years to develop or the market for them doesn’t exist yet, and may never.
Innovation funds on average charge around .75% to 1.5% in fees annually.
Words Matter
The name of a fund is so important it’s actually regulated. A fund’s name is one of the first pieces of information investors come across. Be aware that fund managers and marketing departments are making the names of funds enticing by appealing to your fears and hopes. The companies that create these funds don’t make profits because the funds do well. They actually make money from charging fees off investor capital. That means they make money when they charge you fees for investing in their fund. Whenever you come across a fund, red flag words or not, check it out. Read up on it. Figure out what its fees are. Is the fund meant to enrich you or the fund’s managers and firm? The red flag fund words are a good hint that it’s probably the latter.
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