Crucial Facts When Evaluating Unmanaged V ETFs

Post on: 11 Июль, 2015 No Comment

Crucial Facts When Evaluating Unmanaged V ETFs

Summary

  • In discussing why ETFs and index funds are doing better than managed funds, many fail to consider some primary but often unrecognized reasons why this may be true.
  • Most Large Cap managed funds attempt to provide a smoother ride than S&P 500-type ETFs and mutual funds, and thus, typically include foreign stocks as well as some cash.
  • But this diversification comes at a cost, especially recently, since these non-US-stock investments have badly trailed US stocks over the last 5 years.
  • S&P 500-type ETFs/funds are very heavily weighted to the largest capitalization stocks and will only outperform when these stocks are outperforming most other stocks as they are now.
  • Index ETFs/funds are excellent choices if you are willing to assume all risk management yourself, especially in an overvalued market; professional managers can help less hands-on investors avoid overvalued stocks.

Investors these days are more and more likely to be bombarded by the notion that mutual fund managers must be poor at what they do because the vast majority of these pros fail to surpass the performance of the S&P 500 index, the most commonly used benchmark in judging portfolio proficiency.

The swelling tide of opinion against using fund managers, as opposed to investing in an ETF such as SPDR S&P 500 Trust (NYSEARCA:SPY ), Vanguard S&P 500 (NYSEARCA:VOO ), or a non-managed fund that merely mimics the index itself, is often extended even further to argue that all stock investments are inherently unpredictable. If so, fund investors are always much better off in the lowest cost variants, namely index-tracking funds and unmanaged ETFs, since even if a manager is successful in equaling the performance of the index, higher management and trading fees will cause him/her to wind up underperforming the index.

The movement away from managed funds, and toward passive ones, has been gaining more and more adherents. Of course, the longer non-managed funds outperform as compared to managed ones, the more these beliefs will be reinforced. And for quite a while now, and most notably so far this year, the non-managed funds are beating the pants off managed ones.

As of Nov. 26, while the S&P 500 index was up 14.3% including dividends, a quick glance at the year-to-date performance of most managed stock funds shows the great majority are up considerably less. In fact, over the last 1, 3, 5, and 10 year periods, the index has beaten the annualized total return of the average US diversified stock fund, as shown below.


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