Active fund managers have been underperforming broad stock market benchmarks for the past decade, supporting the notion that investors may be better off with a passive strategy or index-based exchange traded fund.
According to Bank of America Merrill Lynch data, over the 10-year period ending in 2015, an average of just 37% large-cap mutual funds outperformed the Russell 1000 in any given year, reports Justin Lahart for the Wall Street Journal.
It has been a trying time for market participants this year as well, with only 14% of active managers outpacing the benchmark Russel 1000.
Investors may have been better off tracking the benchmark large-cap index, instead. For instance, the iShares Russell 1000 ETF (NYSEArca: IWB) rose 8.3%, Vanguard Russell 1000 ETF (NasdaqGM: VONE) gained 8.2% and SPDR Russell 1000 ETF (NYSEArca: ONEK) added 8.0% year-to-date.
SEE MORE: Active Managers Losing Ground to Passive Index Funds, ETFs
Contributing to the underperformance of active managers, company stocks are beginning to move in lockstep with one another, diminishing the chances of cherry picking an outperformer from the dregs. Meanwhile, investors have increasingly turned to index funds as a way to diversify portfolios and play broad market segments, which have also made stock selection less effective.
[related_stories]Additionally, the combined effects of an uncertain global economy and weak company earnings have made it particularly hard for active stock pickers to select winners this year, especially as many had an overweight opinion on the financial sector going into this year after the Federal Reserve hiked interest rates for the first time in almost a decade back in December 2015.
Over the course of 2016, global volatility gripped markets and shifted perception of macroeconomic outlook, which caused many investors to group individual company stocks into baskets that have only limited connection to fundamentals. Consequently, Merrill strategist Jill Hall argued that stocks have had tighter correlations with one another and provided less scope for active pickers to outperform.
SEE MORE: ETF Investors Jumped Into Gold, Value Plays Over June
Meanwhile, the ongoing so-called earnings recession has also diminished the number of opportunities in the equities market, pushing more investors toward value, dividend payers and other bond-esque stocks.
For more information on passive funds, visit our indexing category.