Passive ETFs Continue to Stand Out as Active Funds Underperform

The markets roiled in response to the coronavirus pandemic, and most U.S. large-cap actively managed mutual funds underperformed the benchmark S&P 500, while passive ETFs continued to help investors track their favorite broad market benchmarks.

The S&P 500 declined 34% from its February high to March lows, but it soon turned around and surged 30% by the end of April, enjoying its best single-month gains since January 1987, the Wall Street Journal reports.

Many believed that this volatility was a good time for expert stock pickers to shine. However, during those uncertain months, the majority of U.S. equity funds generated weaker returns, after fees, than a broad stock index, according to S&P Dow Jones Indices data.

“2020 has been a ripe environment for active management to shine and show the value that stock selection can provide,” Todd Rosenbluth, senior director of ETF and mutual-fund research at CFRA, told the WSJ.

Active managers “got a pitch down the middle, and they’re swinging and missing more often than they would like,” Rosenbluth added.

S&P Dow Jones Indices found that Of all actively managed U.S. stock funds, 64% underperformed the S&P Composite 1500 index, which tracks large-, mid- and small-cap stocks, in the period from January through April. Nevertheless, it is still better than over the long term – over the past 15 years, 88% of actively managed U.S. equity funds underperformed the composite index.

The iShares Core S&P Total U.S. Stock Market ETF (ITOT), which tracks the S&P Total Market Index, returned -0.3 so far this year and generated an average 8.9% average annualized return over the past 15 years.

Active managers may have missed out on the continued outperformance of mega-cap technology names that have led the 11-year bull market, such as Amazon, Microsoft, Apple, and Facebook.

“The largest companies, like Microsoft and Apple and Facebook, that have won, if they continue to win, it’s hard to beat them when you’re trying to be different than the benchmark,” Rosenbluth said.

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