Active vs. Passive? We have a winner
In the 1980s mutual funds that could advertised good performance and their insightful portfolio managers, some of whom (Peter Lynch, for one) became celebrities.
At that time “low cost” funds were those with sales charges (called “loads”). Indexing was in its infancy. People thought it was crazy to own only an index rather than have a manager pick attractive stocks or do so yourself. That was then.
The debate of active versus passive appears to be over. Thanks to their low fees, index funds have outperformed most of their actively managed peers, and 8 of the 10 largest mutual funds simply track an index.
Last year $340 billion was pulled from U.S. actively managed funds while $505 billion went into U.S. passively managed funds.
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That wouldn’t happen unless the market was efficient, or nearly so. If analyzing a stock’s bullish fundamental or technical picture automatically would lead to outperformance, then actively managed funds would do better.
But if the analysis doesn’t lead to better decisions, however, then it’s best to keep costs minimal. That’s where Vanguard comes in.
Vanguard is the market leader in index funds. Since the funds simply track an index they can have extremely low fees. Their S&P 500 ETF only charges 0.05 percent annually.
Vanguard’s assets recently climbed to $4 trillion and in 2016 their funds pulled in more new money than all of its competitors combined.
While baby boomers still like mutual funds, exchange-traded funds (ETFs) are gathering assets faster. Most every ETF is passively managed to make indexing even more popular.
Of course, just because you own passively managed ETFs doesn’t make you a passive investor. ETFs provide the flexibility to easily invest in specific areas of the market.
Momentum investors can buy the strongest areas, currently Regional Banks (IAT) and Broker Dealers (IAI). Bottom-fishers can buy areas that have recently emerged from weakness, such as Biotechnology (IBB).
And the extremely liquid S&P 500 SPDR (SPY) allows traders to easily jump into and out of the market. Of course, that game is easier said than done, and was especially hard during the last eight years.
By holding a combination of individual stocks (no cost of ownership) along with some low cost index funds, an investor can build an attractive portfolio that overweights specific securities while avoiding areas that are less attractive. And this can be done while paying very little in fees. That is to our advantage.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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