And the winner is…….

Well, winner is a relative term but I’m going to give you a real life example of how mutual funds simply can’t compete against Exchange Traded Funds. I’ll admit that I am biased since I primarily invest in ETFs but let me lay out my argument in terms that are simple: Returns.

Back in March of 2006, I decided to invest in XLE (Energy Exchange Traded Fund) and I purchased 100 shares at $54.14. Below is a table of all my transactions related to this ETF.

Date Activity Symbol Share Price Cost
3/27/2006 Bought100 Shares XLE $54.14 -$5419
3/27/2006 Sold 1 Contract XBTIB $4 $385
7/31/2006 Dividend XLE Dividend $19.75 $19.75
9/19/2006 Sold 1 Contract XBTJB $1.30 $115.00
10/3/2006 Dividend XLE Dividend $17.67 $17.67

As you can see, I have sold two single $54 Call contracts on XLE at two different time frames. The first was back in March when I originally bought XLE and that netted me a profit of $385 (including commissions). While holding on to the ETF, I got paid a dividend of $19.75 in late July and then another dividend in October of $17.76. In September, the original Call contract I had sold had expired worthless so I kept the ETF and the PREMIUM.

Wanting to squeeze more profit out of this gem, I sold the October $54 Calls for $1.30 and netted another $115 (including commissions) profit.

The Call Option will likely expire worthless (not guaranteed because anything can happen) but if it does, I’ll be in a position to sell November or December Calls and reap more profit.

So what is my total return from March thru October? Let’s add it up: $385+$19.75+$115+17.67 = $537.42 (includes all commissions). My original investment was $5419 (including commissions) so my total return is: 9.92% in 7 months.

What about Vanguard VGENX? According to the YTD return on that fund is 7.89% but if you bought VGENX at the same time I bought XLE on March 27, 2006, you would have bought in at $61.78 and today VGENX is trading at $59.07 and you would be at a LOSS!


Keep in mind that I’m not done making money on this baby for the year. If XLE hovers around $53 then I’ll be able to sell November $54 Calls for $1.45 or December $54 Calls for $1.85. For November, my additional profit would be another $130 dollars and that would bring up my total return to 12%!

If Vanguard climbs another few bucks you might break even!

The naysayers will argue that commissions will kill your returns.  That’s not really true especially with new brokers like Zecco and Bank of America offering FREE trades.  My returns INCLUDED commissions and they would only have been higher if I hadn’t paid any commissions with Free broker.  If you pay more than $5 for trade then get a different broker! The next thing the naysayers will say is that you have to watch and trade daily.  I posted the transaction dates. I traded once in March (two transactions), once in September.  Is that too much for you to earn 9%?  I may trade one or two more times (October/November) for the year to bring my returns up to 12 or 15% so it’s no big deal.

The last thing naysayers will say is “What if VGENX goes through the roof to $100!”  Well, in that case, you win.  Just sit back and wait for VGENX to hit $100 and your set.  Personally,  I’m happy with 12% returns annually and I automatically take cash off the table each time I capture a premium.