How to Invest

From 1998 until 2007, the SweetSpot Portfolio was invested exclusively in Fidelity funds, which are often subject to surcharges when purchased (if they can be purchased at all) at brokerages other than Fidelity Investments. Therefore, the best way to trade the SweetSpot Investment Strategy is through an account with Fidelity or another brokerage that offers Fidelity funds free of surcharges. SweetSpot Investments LLC receives no compensation from Fidelity Investments (or any other broker or fund sponsor) in exchange for recommending its funds or services.

These days investors often have a choice of investment vehicles within a given sector.  When the choice is between an exchange-traded fund (ETF) and an actively managed mutual fund, the following considerations apply:

-- Like the index funds they resemble, ETFs distribute much less in taxable dividends and capital gains than actively managed mutual funds. Therefore, they are preferred in taxable accounts. (This is not an issue in tax-deferred and tax-exempt accounts.)

-- ETFs trade like stocks, meaning that investors pay a commission each time shares are purchased. This makes ETFs less suitable than commission-free mutual funds for investors who intend to invest regularly in small amounts.

-- ETFs charge annual fees that are much lower than those imposed by actively managed mutual funds.  Still, an ETF's returns after fees are deducted may or may not produce better returns than an actively managed fund in the same sector.

-- You would think that when you invest in a Fidelity sector fund you are getting a fund manager with special expertise in his or her fund's sector.  In reality, over the years Fidelity has used its Select sector funds as a training ground for inexperienced fund managers being groomed to manage bigger funds.  Fidelity could get away with that because its funds were the only game in town if you wanted to trade in sectors.  Today, however, Fidelity faces fierce competition from ETFs.

As part of an overall "revamping," Fidelity has been hiring experienced managers for its Select funds, managers who possess sector-specific expertise.  This bodes well for the future performance of Fidelity funds that SweetSpot investors choose to buy.

Still, ETFs now exist that, from a SweetSpot perspective, offer advantages over Fidelity funds.  Like SweetSpot, they base their holdings on objective criteria that remove the "human" element from the equation ("greed minus fear = risk tolerance").  While still relatively new, they track "enhanced" indexes that have been back-tested and shown to beat the market over time.  In particular, PowerShares ETFs have, as a group, continued to beat the market (and most corresponding Fidelity funds) in real time.  We don't know if that will continue, but we do know that it would cost us about half of what Fidelity charges in fees to find out....

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