Morningstar recently reported on 3,000 active funds that it had analyzed over the past year and found that only 47% of active funds survived and outperformed passive peers. The report looked at two key factors when it measured returns: the survivorship of the ETF and its fees.
The numbers reported are inclusive of the ETFs that closed during the 12-month period, and survivorship bias is an important aspect that needs to be taken into account. CNBC reported that 40% of all large-cap funds don’t make it over a 10-year period.
“We include all funds, including those that didn’t survive,” Ben Johnson, director of global ETF research and author of the report, told CNBC. “There was real money trapped in those funds.”
However, one of the biggest factors that works against active funds is their fees. For active managers that outperform and produce alpha, much of that return can get cut into if the expense ratio of the fund is high. Often, active managers are managing to outperform their benchmarks, but the final return at the end of the day ends up being less than that of their passive fund counterparts that have lower fees.
Cheaper active funds were found to have outperformed twice as well as the most expensive active funds over a 10-year period (with a success rate of 35% for the former and 17% for the latter), and they were more likely to survive than the priciest active fund options.
“What we find in almost every case, is that cheaper actively managed funds do better than more expensive funds,” Johnson said.
One area that has seen excellent performance is the intermediate core bond category, in which almost 85% of active funds outperformed passive funds.
“The post-COVID-crisis rebound in credit markets has been favorable for active funds in the category, which tend to take more credit risk than their indexed peers,” Johnson said.
Active management firm T. Rowe Price believes in the difference and benefits to active investing and active management as it works to provide risk-adjusted returns for investors. The firm currently offers eight actively managed ETFs with a range in fees from the T. Rowe Price Ultra Short-Term Bond ETF (TBUX) at 0.17% up to the T. Rowe Price Blue Chip Growth ETF (TCHP) at 0.57%.
The firm brings a bevy of experience and research to its products, with portfolio managers averaging over 20 years in investing each, as well as over 400 investment professionals dedicated to researching companies within ETFs.
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