Mutual funds ban frequent traders

So you think mutual funds aren’t serious about stopping frequent traders from messing with their products?

Money Magazine reported recently that T. Rowe Price had blocked approximately 1,300 American Airlines employees from trading in their retirement plan mutual funds due to excessive buying and selling. Some employees were banned forever. Money said that Southwest Airlines employees have been warned by Vanguard to stop frequent trading.

Most mutual funds reserve the right to ban investors from buying and selling their funds, but they rarely do so. Investors who engage in frequent trading usually do so on the guidance of a newsletter or adviser.

Mutual funds threaten to ban traders because such activity makes it difficult for the funds to manage their portfolios when people are frequently buying and selling.

Investors who think they can gain an edge by frequent trading (we believe they cannot) should consider exchange traded funds (ETFs) instead. These investments are bought and sold on an exchange, not from and to a fund company. You can buy and sell most ETFs all day without irritating anyone.

Trading ETFs too frequently can hurt performance. Not only are there transaction costs, but there are taxes to be considered, too, where the trading takes place in a taxable account.