Passive Index ETFs Stand Out After Active Funds Underperformed Again

The majority of actively managed large-cap funds continued their streak of underperforming the benchmark S&P 500, highlighting the benefits of just sticking to a passive index-based exchange traded fund that seeks to reflect an underlying benchmark.

According to Bank of America, just 1% of active growth managers outperformed the S&P 500’s 28.7% total return in 2021, the Financial Times reports.

The S&P 500 enjoyed another stellar year on strong gains from major tech giants like Meta (formerly known as Facebook), Apple, Amazon, Microsoft, and Google, which, combined, accounted for almost one-third of the S&P 500’s total performance.

“Growth managers that were underweight this handful of technology stocks were likely to have underperformed last year,” Ohsung Kwon, a quantitative strategist at BofA, told the Financial Times.

Investors seem to be fed up with the underperformance of actively managed funds and the high fees that come with the underwhelming returns. Investment outflows mounted last year, extending an exodus from active funds that has gone back to 2008 as more investors turn to cheap and easy-to-trade ETFs. Withdrawals from actively managed U.S. domestic equity funds rose to $392.7 billion in 2021, according to preliminary data from the Investment Company Institute.

Meanwhile, passive index-based ETFs that benchmarks such as the S&P 500 and the technology-heavy Nasdaq Composite gauge continued to attract record money inflows. U.S. domestic equity ETFs brought in net inflows of $476.4 billion in 2021, according to Citi data.

Weighing on actively managed growth strategies, many were underweight on Apple last year, compared to the benchmark S&P 500. The tech giant just became the first company valued at $3 trillion after adding $1 trillion to its market capitalization in the last 16 months.

Active growth managers were also underweight on Tesla and Microsoft, which both returned about 50% last year, Kwon added.

Additionally, so-called core active managers who pick high quality companies with strong fundamentals also largely underperformed, with only a quarter of these types of managers beating the S&P 500 last year.

“Unfortunately, active fund managers were unable to capture the available alpha,” David Kostin, chief U.S. equity strategist at Goldman Sachs, told the Financial Times.

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