Low Fees Help Passive, Index-Based ETFs Shine

However, it is better to compare the large-cap core mutual fund performances to passive, low-cost ETFs since index returns of the S&P 500 are based on no fees. In a mutual fund versus ETF comparison, the iShares Core S&P 500 ETF (NYSEArca: IVV) only has a 0.04% expense ratio and was up 12.2% year-to-date through December 8, or more-or-less in line with the index it seeks to reflect – IVV may make up the 0.04% fee difference and more through securities lending practices.

On the other hand, Rosenbluth pointed out that the actively managed Blackrock Large Cap Core Fund (MDLRX) comes with a 1.14% net expense ratio and was up 10.7% year-to-date through December 8 due to its overweight positions in healthcare and technology, along with underweight industrials component. The mutual fund also underperformed the S&P 500 in 2014 and 2015.

The industrial sector has been outperforming in recent weeks on the “Trump Bump,” and CFRA has a bullish outlook on the sector due to the strong fundamentals and still attractive valuations. Among the various broad industrial sector ETF picks, the Fidelity MSCI Industrials Index ETF (NYSEArca: FIDU) is the cheapest on the block.

“Investors have a wide array of lower-cost equity and fixed income ETFs and index funds to consider, often from the same asset manager,” Rosenbluth said. “Investors need to understand that identifying long-term actively-managed outperformers remains quite hard, particularly when the funds under consideration have relatively high fees. Until asset managers bring costs to more competitive levels, investors in active funds will start the year with ground to make up.”

Despite their potential short-comings, actively managed equity mutual funds continue to find support as investors remain somewhat loyal to the products and continue to pile in more money into the funds, Rosenbluth added.

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