More are taking a shine to passive, index-based exchange traded funds as disillusioned active mutual fund investors become fed up with underperforming assets and a large tax bite.
Many mutual fund investors with taxable accounts are discovering that their active funds realized significant capital gains that need to be paid taxes on, reports Kelley Holland for CNBC.
According to CapGainsValet, about 453 mutual funds estimated their capital gains distributions would be over 10% of net asset value, 52 calculated distributions would exceed 20% and 12 projected distributions of over 30% as of December 15.
To add insult to injury, investors would have to fork over the high capital gains as most actively managed funds underperformed benchmark indices and passive funds. According to Lipper data, about 85 of active large-cap stock funds failed to even match their benchmark indices. [Why Active Funds Are Underperforming Index ETFs]
Consequently, more investors are turning toward passive fund options, like index-based ETFs. For instance, investors poured a record $215.5 billion into Vanguard funds last year, including $75.3 billion into Vanguard ETFs. The ETF industry itself reached another milestone in December, accumulating $2 trillion in assets under management. [U.S. ETFs Top $2 Trillion in Assets]
“In taxable accounts, actively managed funds are really tough,” Mark Wilson, chief investment officer of The Tarbox Group, said in the CNBC article. “It’s really difficult to beat indexing.”