ETF Trends
ETF Trends

Bolstering the case for passively managed exchange traded fund as a good way for investors to tap into the equities market, active stock fund managers just experienced one of their worst quarters in almost two decades.

Less than one in five large-cap funds outperformed the benchmark S&P 500 Index, the lowest number of beats since at least 1998, reports Jeff Cox for CNBC.

After a tumultuous start to the new year, the SPDR S&P 500 ETF (NYSEArca: SPY) regained its lost ground and eked out a 1.5% return over the first quarter.

Among the various investment categories, growth-focused active funds were the worst performers, with only 6% of managers beating their benchmarks.

The SPDR S&P 500 Growth ETF (NYSEArca: SPYG), which targets large-cap growth stocks taken from the S&P 500, was up 1.1% over the first three months of the year.

On the other hand, value managers fared better with a 19.6% outpacing their passive benchmarks.

After the mid-February lows, value stocks led the market rebound. For instance, the SPDR S&P 500 Value ETF (NYSEArca: SPYV) was 1.7% higher over the first quarter. Additionally, dividend-oriented ETFs also outperformed, with the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) up 5.3%, iShares Select Dividend ETF (NYSEArca: DVY) up 9.0% and SPDR S&P Dividend ETF (NYSEArca: SDY) up 9.2% over the past three months.

Savita Subramanian, BofAML’s equity and quant strategist, argues that fund managers’ “recipe for distress may boil down to a few factors,” including high levels of correlation, which makes it difficult to outperform market benchmarks.

Moreover, momentum stocks took an unusual pommeling over the first quarter, notably biotechnology sector stocks, which dipped into a bear market, along with the general underperformance among common fund manager picks.


Consequently, the ongoing underperformance in active stock funds helps explain the continued investment preference for passive index ETFs that try to reflect the performance of an underlying index but with lower costs than active options. There are currently 751 passively managed stock ETFs that show an average 0.57% expense ratio – the cheapest show a 0.03% expense ratio.

So far this year, investors have yanked $50.2 billion from equity mutual funds and $176 from stock ETFs, according to BofAML and EPFR Global.