Index-Hugging Mutual Funds Shamed by Cheap S&P 500 ETFs

May 22nd at 11:43am by John Spence

Active mutual fund managers are supposed to earn their keep by outperforming their benchmarks. Therefore, investors in expensive large-cap funds that are simply replicating the index should probably move into cheaper index funds and ETFs tied to the S&P 500.

Morningstar associate editor Adam Zoll recently called out active large-cap funds that have hugged the benchmark S&P 500 during the past 10 years while charging above-category average fees.

“For investors in these funds, all of which charge at least 120 basis points, a serious reappraisal may be in order,” he wrote.

“If a fund you own shows a high degree of correlation with its benchmark (say, 95% or greater), delivers mediocre performance or worse, and charges high fees, you might want to seriously consider switching to a lower-priced actively managed fund that doesn’t hug the benchmark, or to a low-cost index fund,” Zoll concluded. “That way you stand a better chance of getting more by paying less.”

ETFs hitched to the S&P 500 include SPDR S&P 500 (NYSEArca: SPY), Core Shares S&P 500 ETF (NYSEArca: IVV) and Vanguard S&P 500 ETF (NYSEArca: VOO). All three ETFs have expense ratios under 0.1%.

Table source: Morningstar

Full disclosure: Tom Lydon’s clients own SPY.

The opinions and forecasts expressed herein are solely those of John Spence, 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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