Active Funds Trailing Index ETFs Despite Low Volatility, Correlations
March 11th at 4:30pm by Tom Lydon
Even though market volatility and correlations have declined, active stock pickers are still having a hard time beating indices and broad exchange traded funds.
After the string of financial crises over the past few years, the markets experienced large swings that saw equities move in lockstep, weighing on stock pickers and fueling the move toward broad indexing investments.
The battle between stock picking and indexing has escalated as investors turned to ETFs that offer lower fees and exposure to broad indices. [Four Hidden Risks in Bond ETFs]
“Correlations are dropping but so is volatility. Both of these things happening at the same time mean the benefit from stock selection doesn’t grow,” Art Steinmetz, chief investment officer at Oppenheimer Funds, said in a CNBC report. “Differences across stocks are still going down because overall volatility is going down.” [Inverse VIX ETFs Rise 170% as Volatility Hits Five-Year Low]
According to JPMorgan Chase, only 37% of active managers are beating their benchmark indices while 63% have missed their target. In contrast, only 7% have beat the benchmarks by over 2.5%.
“There’s a lot to be said for buying the indexes and ETFs and setting it and forgetting it,” Nadav Baum, executive vice president at BPU Investment Management, said in the article. “Stock picking is a tough game.”
The Dow is at a record high and corporate profits continue to grow, so it could be time for stock pickers to make a comeback, reports Alexandra Scaggs at Dow Jones Newswires.
“So, as corporate financial results improve, company-specific factors such as earnings appear to matter more in terms of share movements, according to market strategists,” according to the report.
“That presents an opportunity for the investment managers who make their trade by crafting portfolios stock by stock on company fundamentals, known as active managers, as opposed to those to set up their portfolios to track stock indexes,” it added. “The traditional active managers oversee mutual funds, and they are often buy-and-hold-style investors. Since 2007, passive index funds, which track a benchmark and are cheaper than their active brethren, have outdone them in terms of yearly returns. But that may be changing.”
Of course, longtime indexing fans who use ETFs won’t be holding their breath.
For more information on ETF indexing, visit our indexing category.
Max Chen 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.