- Mutual funds have been underperforming their benchmarks
- Investors interested in these investment styles may be better off with a low-cost, index-based ETF
- S&P Dow Jones Indices continuously paints a stark picture that many of these actively managed mutual funds may not be worth the cost
Mutual funds have been underperforming their benchmarks and issuing high fees as well to add insult to injury. Alternatively, investors interested in these investment styles may be better off with a low-cost, index-based exchange traded fund.
S&P Dow Jones Indices continuously paints a stark picture that many of these actively managed mutual funds may not be worth the cost, Todd Rosenbluth, S&P Global Market Intelligence Director of ETF & Mutual Fund Research, writes in a note.
According to the latest S&P Indices Versus Active Funds, or SPIVA, U.S. Scorecard, just 25% of all domestic equity mutual funds outperformed the multi-cap S&P 1500 Index in 2015, with only 19% and 22% outperforming over their respective three- and five-year periods.
Over the one-year period, mid- and small-cap growth funds were especially poor performers. For instance, only 20% of all mid-cap growth funds outperformed the S&P MidCap 400 Growth Index, and investors paid an average 1.3% fee on mid-cap growth funds for the that underperformance as well. In comparison, mid-cap ETFs have an average expense ratio of 0.42%, according to XTF data.
“On an equal-weighted basis, the average mid-cap growth fund returned -1.23% and lagged by 328 basis points in 2015, much higher than the expense ratio incurred,” Rosenbluth said. “This suggests to us that unwarranted stock selections contributed to underperformance.”
Additionally, just 12% of all small-cap growth funds outperformed the S&P SmallCap 600 Index. Funds that track larger companies fared slightly better, with 51% of all large-cap growth funds outperforming the S&P 500 Growth index.
Alternatively, investors may have been better off just replicating the various asset categories and styles through relatively cheap index-based ETFs. For example, the iShares S&P 500 Growth ETF (NYSEArca: IVW) tracks the S&P 500 Growth Index and comes with a 0.18% expense ratio. The iShares S&P Mid-Cap 400 Growth ETF (NYSEArca: IJK) follows the S&P MidCap 400 Growth Index and has a 0.25% expense ratio. The iShares S&P Small-Cap 600 Growth ETF (NYSEArca: IJT) reflects the S&P SmallCap 600 Growth Index and has a 0.25% expense ratio.
“In recent years, investors have been shifting assets out of actively managed U.S. equity mutual funds and into passive index mutual funds and ETFs,” Rosenbluth added. “S&P Global Market Intelligence expects the trend to continue. While there are bright spots in every investment style, the appeal of low-cost alternatives that do not take sector bets is highly compelling in our opinion.”