Do exchange traded funds (ETFs) generate better returns than regular index funds? Morningstar Research shows the outcome is close, but the low-cost index funds outperform ETFs more often than not. Taking performance data back to 1997 for some of the most well-known and largest ETFs and index funds, they divided them into 4 categories: S&P 500 stock index, total U.S. stock market, international stock markets, and a broad-based U.S. bond index. These are generally the areas for small investors who are building diversified portfolios. The big, low-cost, index funds from Fidelity and Vanguard outperformed the ETFs in most of the comparisons, reports Ian Salisbury for The Wall Street Journal. The one-, three- and ten-year after-tax performance was taken into consideration as well. In defense of ETFs, they have lower costs than mutual funds, across the board.  For ETFs, it’s about the management, not the structure.

The difference however is minimal, kinda like kissing your sister. I appreciate the analysis, but domestically, the most money has been made in mid and small cap stocks in the past seven years. It would be nice to see those asset classes included in the analysis. In addition, other global regions should be considered.

So, even if broad based index funds slightly outperform their ETF counterparts, does that mean investors should stick with conventional index funds for their large cap allocation and round out the rest of their portfolio with ETFs representing other asset classes, sectors and global regions? I think in this case, it’s going to be one or the other.

Tags: Sector ETFs