ETF Trends
ETF Trends

Actively managed mutual funds have been getting pummeled over the past few months, adding to the investment case for passively managed index-based investments and exchange traded funds as a better way to track the markets.

According to a J.P. Morgan U.S. equity strategy note, 67% of mutual funds underperformed their benchmarks in the third quarter, with over one-third, or 34%, falling at least 250 basis points, or 2.5%, behind their benchmarks, reports Matt Turner for Business Insider.

“The Sector positioning explains recent active manager underperformance,” according to J.P. Morgan. “In 3Q mutual funds have been favoring Healthcare (+2.0% overweight) with their largest single overweight in Pharma/Biotech (+1.1%) while most underweight Staples (-2.0%). During the quarter, Healthcare significantly underperformed (-11%) while Staples fared much better (-0.9%).”

The Health Care Select Sector SPDR (NYSEArca: XLV), which tracks the S&P Health Care Select Sector Index, fell 10.7% over the past three months. Meanwhile, the Consumer Staples Select SPDR (NYSEArca: XLP), which tracks the S&P Consumer Staples Select Sector Index, only dipped 1.5% over the past three months.

The tendency for managers to chase after outperformers and underweight areas that have been falling behind remains an issue investors have to consider when investing with an actively managed fund – you are subject to the investment habits of the managing team.

Alternatively, investors interested in an easy way to track the S&P 500 have a number of options available, including the SPDR S&P 500 ETF (NYSEArca: SPY), iShares Core S&P 500 ETF (NYSEArca: IVV) and Vanguard 500 Index (NYSEArca: VOO). [Active Fund Aches: Are Passive ETFs More Profitable?]

Moreover, many investors may be put off by the high fees on top of the underperformance in actively managed funds.

“We found that over the past five years ending in 2014, active funds levied higher charges, at least double those of passive funds, regardless of where the funds were domiciled,” according to Utkarsh Agrawal, Senior Analyst, Research & Design, S&P BSE Indices. [Indexology® SPIVA Global Actively Managed Report]

In contrast, the broad index ETFs are much cheaper than actively managed equity funds. SPY has a 0.09% expense ratio, IVV has a 0.07% expense ratio and VOO has a 0.05% expense ratio.

For more information on the ETF industry, visit our current affairs category.

Full disclosure: Tom Lydon’s clients own shares of SPY and XLP.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.