Many expected this to be the year that active mutual fund managers would be able to pick and choose their battles and generate alpha for investors. However, active managers continued to underperform benchmarks, bolstering the case for low-cost, passive index-based exchange traded funds.
According to Goldman Sachs analysis, only 27% of large-cap core funds beat the S&P 500, which was also below the 10-year average of 36%, reports Jeff Cox for CNBC. [Active Mutual Fund Managers Can’t Keep Up]
Meanwhile, S&P 500 index-related ETFs, including the SPDR S&P 500 ETF (NYSEArca: SPY), iShares Core S&P 500 ETF (NYSEArca: IVV) and Vanguard 500 Index (NYSEArca: VOO), gained about 1.9% this year.
Weighing on active managers’ portfolios, most stock pickers under-allocated to many of the stocks that experienced the biggest gains. For instance, fund managers missed out on Netflix (NasdaqGS: NFLX) and Amazon (NasdaqGS: AMZN), the two best performing components of the S&P 500. [Internet ETFs’ Big 2015]
On the other hand, index-based ETFs would just passively reflect the performance of a benchmark and only make changes to their component holdings when the underlying index shifts positions.
Fund managers have also recently taken an overweight position to the financial sector after the Federal Reserve began raising interest rates. ETF investors can also capitalize on the shift in monetary policies through diversified financial sector plays, such as the iShares U.S. Financials ETF (NYSEArca: IYF), Financial Select Sector SPDR (NYSEArca: XLF) and Vanguard Financials ETF (NYSEArca: VFH). [Financial ETFs Poised to Strengthen]
While active funds continue to underperform benchmarks, overall asset flows in the fund industry also shows that investors are growing more amenable to the ETF investment vehicle. According to Bank of America Merrill Lynch, investors funneled $198.8 billion into global equity ETFs this year and pulled $177.2 billion from mutual funds. Nevertheless, mutual funds still make up the larger portion of the investment industry with $13.2 trillion in assets under management, but ETFs have eaten away at mutual funds’ market share, accumulating about $2.15 trillion in assets.
For more information on the fund industry, visit our mutual funds category.
Max Chen contributed to this article.