Market Pulse: Active versus passive funds? Investors have chosen
Special to the Bonanza
In the 1980s nearly every mutual fund was actively managed and Fidelity Magellan (managed by Peter Lynch) was the largest.
The few exceptions were in the Vanguard family where John Bogle championed cost- and tax-efficient index funds. Since then, investors have made it clear which style they prefer.
To be sure, most mutual funds remain actively managed, but they are losing investors as money flows out month after month.
Over the past five years $411 billion have been withdrawn while $301 billion went into passively managed exchange-traded funds (ETFs). Worldwide there are $2.7 trillion in ETFs, double the amount three years ago.
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In my best-selling book “Exchange Traded Profits” I boldly predicted that someday ETF assets will exceed those in actively managed funds. That day will come (there are $15.7 trillion in managed funds now) as investors wake up to cheap, transparent and liquid ETFs that more often than not outperform their managed competitors.
A headline grabber that demonstrates the trend toward passively managed ETFs is that the SPDR S&P 500 Trust (symbol SPY) is now the world’s second-largest right behind Vanguard’s Total Return Market Index (VTSMX).
The three ETFs that have attracted the most inflows the past three years all track the S&P 500. Investors had it right. Most actively managed funds have badly lagged the S&P 500.
Many investors, I included, use-low cost ETFs not to track the overall market but as strategic investments. Instead of holding an index fund I’ll use ETFs to target segments such as healthcare, Nasdaq, dividend payers, etc., making changes as I see the need.
In short, passively managed ETFs are terrific investments for strategic managers and individuals alike. Actively managed funds, with their high costs, are not. Investors have figured that out.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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