Mutual funds have been a mainstay for decades, but disillusioned investors who’ve seen their investments tank in recent years are beginning to look to exchange traded funds (ETFs). While ETFs aren’t marketed as an investment that beats the market, ETFs are beating some mutual funds.
Lawrence Weinman for Seeking Alpha argues that using ETFs for tax swaps is a logical step for any investor. For instance, a mutual fund that is not doing so well can be swapped out with a similar ETF that tracks an equivalent index. [5 Interesting Mutual Fund Stats.]
Weinman notes that investors should not choose mutual funds based on past performance. As was seen in the past couple of years, mutual fund managers that tried to outperform the market instead lost a lot more than the indexes they were trying to beat. If a mutual fund carries more risk and less return than the equivalent index at a higher cost, then it may be logical to invest in an ETF instead. [9 Reasons ETFs Are Better Than Mutual Funds.]
In David Blanchett’s study “Do Passive or Active Investors Make Better Allocation Decisions?,” Blanchett discovered that actively managed domestic equity styles that take large inflows will outperform within three to six months but underperform over three years, writes Larry Swedroe for Money Watch.
Meanwhile, similar passively managed funds outperform both on the short-term and long-term horizons, which suggests that index investors are forgoing the quick and easy money in the short-term and placing better asset allocation decisions over the long-term, says Blanchett.