The failings of many actively managed mutual funds have been on full display again this year as 80% of equity funds focused on large-cap growth stocks are trailing their benchmarks.
Only 17.7% of active managers beat the Russell 1000 index of large-cap stocks so far this year, down from 40.5% for all of 2013. Bank of America calculates that the average fund now lags behind the Russell 1000 by about 2 percentage points. [Lagging Active Funds Make Passive ETFs Look Good]
Passive dividend exchange traded funds are also turning out to be superior bets compared to their actively managed mutual fund counterparts.
“Instead of seeking to outperform the S&P 500 Index on a capital appreciation basis, many equity income funds instead aim to generate a yield for shareholders greater than the average yield on the S&P 500 Index. In other words, the S&P 500 Index may not be the most appropriate benchmark. Instead, investors may be well served to compare the performance of an equity-income fund or ETF to something like the income-focused S&P High Yield Dividend Aristocrats Index,” said S&P Capital IQ in a new research note.
The S&P High Yield Dividend Aristocrats Index is the benchmark for the SPDR S&P Dividend ETF (NYSEArca: SDY). Home to $13.7 billion in assets under management, SDY is one of the largest U.S. dividend ETFs and a favorite among investors because its underlying index mandates companies have dividend increase streaks of at least 25 years for inclusion.
As S&P Capital IQ notes, actively managed equity income ETFs have not done a great job of topping the S&P High Yield Dividend Aristocrats Index.
“So how have equity-income mutual funds done against this different benchmark? Lipper currently has an equity income peer group of 470 mutual funds, with more than 180 new share classes launched since the end of 2011. The average three-year annualized total return for this peer group through November 14 was 16.6%, lagging the gain for SDY. Looking both at the one- and five-year time periods, the average equity income mutual fund has lagged by more than 100 basis points. Indeed, just 26% of all equity income funds with a three-year history outperformed SDY. Part of this is likely related to the 1.2% average net expense ratio for the funds, 85 basis points greater than SDY,” according to the research firm.
S&P Capital IQ rates SDY overweight. SDY has a dividend yield of 2.2%.
The research firm also notes that because many active equity income funds pick dividend stocks based on payout stability not growth, comparing those funds against an ETF such as the iShares Core High Dividend ETF (NYSEArca: HDV).