ETF Trends
ETF Trends

The ongoing underperformance in actively managed mutual funds is triggering a shift in the fund industry toward cheaper, passive index-based exchange traded funds.

The S&P Global Market Intelligence’s Mutual Fund Research Group revealed that only 437 of 2053, or 21%, large-cap fund share classes equaled or beat the 3.57% total return of the S&P 500 year-to-date ended May 31, according to a S&P Capital IQ research note.

“The underperformance of large-cap core funds was wider than the cost of the fund’s expense ratio, highlighting poor stock selection,” according to S&P Capital IQ. “Uncertainty, and potential underperformance, will likely continue as investors battle such headwinds as a June or July hike in the Fed funds rate, as well as Brexit, a slowdown in China’s economic growth, and the upcoming political conventions.”

Related: Investors Lean Toward Large-Caps

Investors often have a large-cap bias, but when markets are volatile, that bias can help investors navigate turbulent times. Of course, there are plenty of ETFs with which to embrace large-caps, including the SPDR S&P 500 ETF (NYSEArca: SPY), iShares Core S&P 500 ETF (NYSEArca: IVV) and Vanguard 500 Index (NYSEArca: VOO). Year-to-date, the S&P 500-related ETFs have increased about 4.0%.


With active funds underperforming their benchmarks, investors have been shifting out of mutual funds and piling into ETFs. Lipper data for the weekly period ended Wednesday revealed stock ETFs attracted $3.9 billion in assets, their largest weekly inflow since April, reports Trevor Hunnicutt for Reuters.

Meanwhile, mutual fund investors yanked $4.7 billion from stock funds over the past week, their 12th straight week of cash redemptions.

Related: 7 Reasons Why an ETF is Today’s Mutual Fund Alternative

Many are growing cautious on speculation over the Federal Reserve’s next interest rate hike in the months ahead. For instance, Janus Capital Group Inc investor Bill Gross warned on Thursday the historic returns that investors have reaped for over four decades are over. His former employer, PIMCO, also warned that the unconventional monetary policies might not sustain growth.

Nevertheless, mutual fund providers have not ignored the shift in investment sentiment. If you cant beat them, join them. Some have already expanded their product lines with ETF options of their own, like Franklin Templeton, which recently launched its first group of passive index-based ETFs.

Related: Franklin Templeton Turns Passive Smart-Beta ETF Provider

For more information on the ETF industry, visit our ETF performance reports category.