ETFs Outperform Mutual Funds
August 4th 2012 at 6:27am by Tom Lydon
Exchange traded funds have been compared to mutual funds since they first hit the market. As the mutual fund industry experiences outflows, some are quick to say ETFs are snapping up the assets. However, mutual funds have held their own in certain areas of the market.
“Active managers are indeed adding modest value in asset classes where fundamental research or the ability to reduce exposure to certain underperforming market segments can provide an edge. However, it remains to be seen whether they can maintain this advantage over the long-term given their higher fees,” Daniel Putnam for InvestorPlace wrote.
Many mutual funds have lagged their ETF counterpart by a wide margin in most sectors except the “small-cap value” area, reports Putnam. This proves the theory that small-cap value offers the most potential to make more returns when active management is involved.
Theoretically, active managers are supposed to have a leg up in the international equities sector, particularly in the emerging markets category. However, this has not been the case. The ETF iShares MSCI Emerging Markets (NYSEArca: EEM) has outperformed its mutual fund counterparts over the past decade. Some attribute this to the ETFs ability to take below benchmark weighting in troubled sectors, particularly in financials. [Morningstar on How to Build a Core ETF Portfolio]
Many of the large bond ETFs have not been trading for more than 10 years, so it is difficult to compare them to mutual funds. The most important difference in the bond sector is that focused ETFs have lower fees, a characteristic that sets them apart. [Mutual Funds are Using ETFs as Cash Pit Stops]
One category that does shine for mutual funds is gold. Good relative performance in the gold category for mutual funds. Investors that pick the wrong funds, such as the gold miner ETFs, may find themselves below the category average.
Overall, ETFs are living up to the hype that they are taking up mutual funds’ assets. Except for gold and small-cap value, the numbers support the growth of these investment tools. [PIMCO Total Return ETF, Fund, Rake in the Cash]
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.