As the exchange traded fund (ETF) industry continues to grow, the question arises as to whether ETFs will be able to replace mutual funds, which have long been believed to be a smart place to put your money.
Hate to burst your bubble, but they’re not. There are some startling numbers out there to prove it.
Dan Heath and Chip Heath for Fast Company recently reported that if you were to own actively managed mutual funds, you will almost definitely retire with a lot less money than if you invested only in index funds. They support this by explaining the results found in a study of mutual fund returns from 1979 to 1998, where mutual funds underperformed the Vanguard 500 Index Fund by a 2.8% per year on average, after taxes.
Similarly, of all 203 mutual funds with at least $100 million under management from 1984 to 1998, only eight were able to beat the Vanguard 500. The myth of the mutual fund is clearly apparent here, as the chances of picking a winning mutual fund in this period is less than 4%.