Frequent Mutual Fund Trading in Rollover IRA

Question

In recent years, I started paying attention to my Rollover IRA again after not looking at it for many years. During the Pandemic last year, I made some adjustments to the portfolio which worked out well for me. I sold the funds and moved the money to a Cash Reserve. I made some adjustments recently to focus on Value funds which also worked well and sold the fund in less than 30 days. But I have been told by the trader that some funds charge a redemption fee if the fund is sold too soon. Fortunately, the funds that I had did not charge a redemption fee. The trading platform that my trader provides funds from columbia thread needle. They have other funds from Fidelity etc... too.

I have a few questions regarding Rollover IRA and trading:

1. I see an Expense Ratio for every fund. What is the best range to look for when choosing the funds? Is less than 1% a good rate?
2. Most of the funds that I selected like CDIRX, CMGRX are called Class R. What does that mean?
3. Is there a special Mutual Fund Class which can be bought and sold every 2-3 months?
4. Do people who have Rollover IRA make investment decisions based on the market conditions and sell and buy funds as often as every month?
5. Do people who have Rollover IRAs invest in ETFs as well as Mutual Funds?
6. Is it advisable to buy ETF instead of Mutual Funds if the person is going to retire in 15-20 years only?

Answer 1

1. 1% is very high.
2. Google says that such funds are only for retirement accounts.
3. Fund management companies classify some mutual funds as such to reduce fees.
4. That's up to the individual, but most people don't. "Buy and hold" should be the motto, with "periodic rebalancing" (where "periodic" is quarterly, semi-annual or even annual).
5. The type of fund (mutual or exchange traded) is irrelevant to the type of account (traditional or Roth IRA, traditional or Roth 401(k), standard taxable brokerage fund, trust, etc). "Rollover" is just a label. It has no tax or investment meaning.
6. In an IRA, it's completely irrelevant.

Answer 2

In addition to your questions, keep these things in mind.

ETFs are, in the end, just mutual funds that are traded (and thus priced) throughout the trading day. There's no practical difference in terms of structure, risk, etc. Both funds and ETF have fees - ETFs typically have lower fees but that's mainly because they are typically passive instead of active, meaning they just trade based on an index and don't actively make investment decisions. Active funds have higher fees but are expected to outperform their benchmark by more than their fee based on good investment decisions.

So it's too broad to just say "ETFs have lower fees and this are better". You'd have to compare similar ETFs and mutual funds - meaning if you are just looking at an "S&P 500" fund, then certainly fees can be compared, but if you compare an S&P 500 fund with an actively-traded fund that hopes to beat the S&P 500 by some amount, then you have to look and see if the fund historically beat the index by enough to make the higher fee worth it.

I have some ETFs in my portfolio that have fees of 1% or higher, but they also have outperformed the S&P 500 by more than their fee on average, so it's worth it to me to pay the "higher" fee.

The structure for fees is also different between the two. ETFs are expected to be traded more heavily in the secondary market, while when you buy a mutual fund you are actually giving money to the fund company. Some funds take a percentage up-front ("front-end loaded") or when you sell ("back-end loaded") or as a periodic fee ("level load). One is not necessarily better than the other, it's just tailored to the cash flow needs of the fund.

The fees for ETFs are periodically reduced from the ETF's net assets, reducing it's price. You don't see the fee directly; it's a hidden drag on the ETF price. So if the S&P index went up 10% over the year, an S&P fund with a 0.05% fee would only go up 9.95%.