ETF Performance Beats Active Management

October 18th at 6:01am by Tom Lydon

According to the latest data from Standard & Poor’s, most passive index funds, including exchange traded funds, beat out the performance of actively managed mutual funds. There are a few exceptions, but on the whole, active management is not outperforming.

“There is nothing novel about the index versus active debate,” the new  S&P Indices Versus Active Funds Scorecard (SPIVA) report notes. “It has been a contentious subject for decades, and there are a few strong believers on both sides, with the vast majority of investors falling somewhere in between.”

Many market watchers are saying that ETFs are posing significant headwinds for actively managed funds and the managers who run them. Morningstar data claims that of ETF and mutual fund market share, only about 12% is represented by ETFs. That means there is a lot more potential for ETFs to gain assets.

The S&P report also highlighted that passive management also wins out over the long term time frame. Most active managers fail to outperform their benchmarks over the long term, reports Rob Silverblatt for US News. [Investors Tired of Lagging Active Funds Pile Into ETFs]

The trend also repeats itself when it comes to bond funds. Take, for instance, actively managed long government bond funds. Over the past five years, 93.62 % of them trailed the Barclays Long Government index, reports Silverblatt.

The one area that is an exception now is the large-cap value fund. Over the past five years, more than 60 % of active funds in that category beat the S&P 500 Value index. Last year the gap was closed, with about 27% outperforming. [PIMCO Total Return Hits $3 Billion in Assets]

“ETF product offerings should continue to expand and gain market share,” RBC analyst Eric Berg wrote in a report released on Tuesday. “We believe that this will come at the expense of actively managed funds.” [Ongoing Shift to Fee-Based Advisor Model Supports ETFs]

The continual focus on investment fees is another boost to passive management. Active management is much more expensive than passive index tracking, and with so many ETFs offered at a low rate, investors are drawn to these vehicles. As more investors realize that fees are a drag on performance, mutual funds will remain under a certain amount of pressure.

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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