The majority of active large-cap funds have underperformed the broader market, but this may benefit the broad equities market and stock exchange traded funds as active managers try to play catch-up.
Only 23% of large-cap mutual fund managers have outpaced the S&P 500 index this year, generating some of the worst performance results in the past decade, reports Steven Russolillo for the Wall Street Journal. [Active Stock Pickers Trail Passive S&P 500 ETFs]
The results are rather surprising, given that correlation between individual stocks in the S&P 500 have declined to pre-financial-crisis levels, which should make it easier for active investors to pick out winners.
Consequently, David Kostin, chief U.S. equity strategist at Goldman, argues that the underperformance could be a boon for the broader market through the rest of the year.
Most large-cap fund managers “will be forced to re-evaluate their portfolios or embrace the likelihood of drafting very disappointing year-end letters,” Kostin said in the article.
Goldman believes that the S&P 500 should keep rallying through the end of the year as more active funds feel compelled to chase performance to boost returns before the calendar-year ends. Year-to-date, the SPDR S&P 500 ETF (NYSEArca: SPY), the iShares Core S&P 500 ETF (NYSEArca: IVV) and Vanguard S&P 500 ETF (NYSEArca: VOO) have increased about 9.6%. [S&P 500’s Race Above 2,000 Lifts Cash for its ETFs]
Since 1991, there have been nine instances when less than 40% of large-cap fund managers undershoot the S&P 500 by the end of the third quarter, and in each of the times, the S&P 500 rallied 2% more in the following fourth quarters than in years when active funds outperformed.
Investors who have a strong conviction in the continue equities market rally can target the faster moving growth and momentum stocks. For instance, the iShares Russell 1000 Growth ETF (NYSEArca: IWF) has gained 4.7% over the past month, whereas the Russell 1000 index is up 4.3%. The iShares S&P 500 Growth ETF (NYSEArca: IVW) has increased 4.4% over the past month, compared to the 4.2% gain in the S&P 500.
Additionally, momentum ETFs, such as the First Trust Dorsey Wright Focus 5 ETF (NasdaqGM: FV) and iShares MSCI USA Momentum Factor ETF (NYSEArca: MTUM), have been gaining speed. Over the past month, FV is up 7.1% and MTUM is up 4.9%. [How to Utilize Smart-Beta ETFs in Your Portfolio]
For more information on the markets, visit our current affairs category.
Max Chen contributed to this article.