Passive index-based exchange traded funds have been outpeperforming active stock pickers as actively managed mutual funds’ failed to focus on strong tech names.
According to S&P Capital IQ Fund Research, 80% of running large-cap mutual funds have underperformed the S&P 500 in 2014. [Active Stock Pickers Trail Passive S&P 500 ETFs]
Bank of America also calculated that less than one in five active managers have beat the market for the year ended October. [Underperforming Active Funds Increase Allure of Passive ETFs]
Tom Lee of FundStrat Global Advisors argues that active managers’ underweight positions in large tech companies contributed to their downfall this year, Bloomberg reports.
Specifically, Lee believes that investors can blame their active manager’s low exposure to Apple (NasdaqGS: AAPL). Apple stocks jumped 41% this year, or almost four times the return of the S&P 500 index. Lee contends that not owning Apple this year accounted for 81.3 basis points of an average 340 basis-point underperformance in active funds.
Lee also pointed out that active funds skipped out on Microsoft (NasdaqGS: MSFT), which increased 33% this year and made up another 36.2 basis points in underperformance.
In contrast, most passive index-based ETFs follow a market capitalization-weighted methodology. Consequently, AAPL and MSFT make up the largest positions in most broad ETFs.