Actively Managed Funds Continue to Lag Indexing, Passive ETFs

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.