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I am contemplating investing in T Rowe Price's Health services fund PRHSX and have been advised that an ETF would be a better way to go. I know the differences between ETFs and open ends regarding their composition and trading systems, but I would like the boards opinion on whether a managed fund is superior to a passive index fund. Happy New Year to all!! and thanks for the use of the hall.
Dea Alex: I have owned PRHSX for over ten year with an annual return north of 14%. There isn't a better health care fund manager than Kris Jenner MD. Regards, Ted
FYI: When I recommend a fund I make sure it's open to new investors from the fund company that manages it. Alex if your interest in PRSHX it's available throught T. Rowe Price. Regards, Ted
Well, aside from getting conflicting info on the availability of PRSHX (TRP confirms that it is open), no one addressed my original question. ETF vs open end fund?
I believe Ted has already given you an answer. The argument for passive funds is that while there will always be some active funds that beat their benchmarks, one does not know in advance which funds those will be. Ted has posited that PRSHX is one of those funds. So he hasn't answered your question about active vs. passive directly, but he has responded to your more specific question of whether PRSHX could be a better investment than an ETF.
Part of the difficulty in providing a response is that you've really asked multiple questions - the specific one about PRSHX, active vs. passive (in general), health care funds, ETFs vs. open end funds (not the same question, since open end funds can be passively managed, and especially in health care, may slice and dice the sector as finely as ETFs).
For example, unless one considers oneself brilliant in market timing (intra-day), and I don't view myself that way, one can discount the trading advantages of an ETF. On the other hand, ETFs have additional costs (spread) that open end index funds don't. Thus all else being equal, I consider open end funds superior. So I were plunking $50K down on a health care index, I'd be more inclined to purchase the Admiral share class of Vanguard Health Care Index (VHCIX) than the ETF share class (VHT). I selected this because this is the rare situation where all else truly is equal. These are two share classes of the same fund (not clones). These share classes have the same expenses (0.14%, per Vanguard). The only difference is the distribution mechanism - and that was your question - ETF vs. open end fund.
Health Care is a sector with a variety of major components, including biotech (where companies tend to be smaller), big pharma, medical supplies, etc. It seems to be one of the few parts of the market where you can slice and dice as finely with open end funds as with ETFs. Notice that PRHSX describes itself as Health Sciences, not health care. From the cover sheet of its prospectus: "investments in companies expected to benefit from changes in the health care, medicine, or life science fields." It delves more heavily into biotech and other areas (and into more mid caps) than your typical health care fund, be it open end or ETF. So you have to answer the question yourself - is this what you're looking for? And if it is, what ETFs would you be comparing it to?
(TRP says it is 1/3 biotech, 1/4 services, 1/5 pharma, 1/7 medical devices, and 1/25 life sciences. In contast, another fine fund, Schwab SWHFX fills it top ten with the usual suspects - Merck, Pfizer, Amgen, J&J, Medtronic, etc., not a whole lot different from the top ten in Vanguard's Index, where J&J, Pfizer, and Merck make up more than 1/4 of the index.)
When you decide to invest in a sector, you're saying that you know it well enough to have certain expectations - you're going against the grain and not buying the market - you're making an active bet. So if you do know the health care sector well enough to make that bet, it seems that the first step is to decide what portions of that sector you really want. PRHSX may have the mix you want, or some other open end or ETF may.
Dear MSF, Thank you for your thoughtful and comprehensive answer to my question. This is the type of response that I had hoped for and you have restored my faith in MFO!
Comments
Regards,
Ted
philpill
Regards,
Ted
I believe Ted has already given you an answer. The argument for passive funds is that while there will always be some active funds that beat their benchmarks, one does not know in advance which funds those will be. Ted has posited that PRSHX is one of those funds. So he hasn't answered your question about active vs. passive directly, but he has responded to your more specific question of whether PRSHX could be a better investment than an ETF.
Part of the difficulty in providing a response is that you've really asked multiple questions - the specific one about PRSHX, active vs. passive (in general), health care funds, ETFs vs. open end funds (not the same question, since open end funds can be passively managed, and especially in health care, may slice and dice the sector as finely as ETFs).
For example, unless one considers oneself brilliant in market timing (intra-day), and I don't view myself that way, one can discount the trading advantages of an ETF. On the other hand, ETFs have additional costs (spread) that open end index funds don't. Thus all else being equal, I consider open end funds superior. So I were plunking $50K down on a health care index, I'd be more inclined to purchase the Admiral share class of Vanguard Health Care Index (VHCIX) than the ETF share class (VHT). I selected this because this is the rare situation where all else truly is equal. These are two share classes of the same fund (not clones). These share classes have the same expenses (0.14%, per Vanguard). The only difference is the distribution mechanism - and that was your question - ETF vs. open end fund.
Health Care is a sector with a variety of major components, including biotech (where companies tend to be smaller), big pharma, medical supplies, etc. It seems to be one of the few parts of the market where you can slice and dice as finely with open end funds as with ETFs. Notice that PRHSX describes itself as Health Sciences, not health care. From the cover sheet of its prospectus: "investments in companies expected to benefit from changes in the health care, medicine, or life science fields." It delves more heavily into biotech and other areas (and into more mid caps) than your typical health care fund, be it open end or ETF. So you have to answer the question yourself - is this what you're looking for? And if it is, what ETFs would you be comparing it to?
(TRP says it is 1/3 biotech, 1/4 services, 1/5 pharma, 1/7 medical devices, and 1/25 life sciences. In contast, another fine fund, Schwab SWHFX fills it top ten with the usual suspects - Merck, Pfizer, Amgen, J&J, Medtronic, etc., not a whole lot different from the top ten in Vanguard's Index, where J&J, Pfizer, and Merck make up more than 1/4 of the index.)
When you decide to invest in a sector, you're saying that you know it well enough to have certain expectations - you're going against the grain and not buying the market - you're making an active bet. So if you do know the health care sector well enough to make that bet, it seems that the first step is to decide what portions of that sector you really want. PRHSX may have the mix you want, or some other open end or ETF may.
Regards,
Ted