In a recent study on index funds, Richard Ferri, founder of Portfolio Solutions, and Alex Benke, a product manager at Betterment, constructed a portfolio that invested in the mutual fund versions of the three respective Vanguard ETFs – Vanguard ETFs are a separate share class of its open-end mutual funds, including 40% in the Vanguard Total Stock market Fund, 20% in the Vanguard Total International Stock Index Fund and 40% in the Vanguard Total Bond Market Index Fund.
Ferri and Benke pitted the index fund portfolio against 5,000 portfolios of actively managed funds that randomly drawn U.S. equity, international equity and U.S. bond funds with the same weights as the index portfolio. The study discovered that the index portfolio outperformed in 82.9% of the simulations, but when they underperformed, the index portfolio only had a median shortfall of 1.25%.
The study found that index portfolios had a higher chance of outperforming actively managed funds over a longer period, partly because of the cost advantage that index funds enjoy.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.