ETFs and Mutual Funds Can Work Together

August 14th at 7:00am by Tom Lydon

Traditional, passively managed exchange traded funds have had substantial net inflows for 2012, outperforming active management. In fact, actively managed equity funds have lost about $50 billion this year.

“Through June, the broad universe of actively managed U.S. stock funds has shed nearly $50 billion in 2012, en route to what seems a certain sixth consecutive year of net redemptions. On the passively managed side, however, investors have sent more than $41 billion to domestic-equity vehicles so far this year,” Shannon Zimmerman wrote on Morningstar. [The ETF Industry Keeps on Growing]

The asset flows seem to create a contrarian case for active management, whether it’s mutual funds or ETFs. However, active management is a strategy that is going to fare well in certain market but not so good in others, reports Zimmerman. Various pockets of outperformance has shown up for actively managed funds over periods of time when passive management has lagged. [ETFs Outperform Mutual Funds]

Most of all, the price or expense ratio of a fund, whether an ETF or mutual fund, is the most telling characteristic indicating if it will outperform over time. The lower the cost, the better the chances are of outperformance. Better returns are one of the most obvious results of low fees.

Nonetheless, passive index funds with low expense ratios do not always outperform those that are actively managed. A decent price tag with a good manager that has at least a 10-year track record can tilt the odds in favor of active management, according to Russ Kinnel. [Some Active ETFs Are Outperforming]

The basic thought here is that investors do not need to choose whether they like ETFs better than mutual funds and vice versa. Investors can use both active and passive management in their strategy and come out ahead.

Tisha Guerrero contributed to this article. 

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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