Indices vs. Mutual Funds: Performance Put to Test

INDICES S MUTUAL FUNDS: PERFORMANCE PUT TO THE TEST WHAT'S THE DIFFERENCE between an Index and an Actively Managed Mutual Fund? ACTIVELY MANAGED MUTUAL FUND INDEX An index is an imaginary portfolio of securities chosen to represent portions of the market. The S&P 500 is one of the most popular broad market indices measuring A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other MUTUAL FUND assets. the stock market. Although you cannot invest in an index directly, you can invest in an exchange-traded fund (ETF) or an index fund that tracks the Each share of a mutual fund ETF represents an investor's proportionate ownership of the fund's holdings and the gains or losses those holdings generate. performance of the index of your choice. Most index funds and ETFS rely on computer programs with little or no human input to track the index. Management costs are a fraction of typical mutual funds since there are no portfolio managers to pay. Index investing is a strategy used by investors to generate the same return as the market while minimizing costs. The portfolio manager of an actively managed mutual fund selects investments in an attempt to beat a particular performance benchmark. A market index serves as this performance benchmark. HOW DO ACTIVELY MANAGED MUTUAL FUNDS MEASURE UP TO THEIR BENCHMARKS? STANDARD &POOR'S Standard & Poor's produces a For the three years ending June 30, 2011, indices have outperformed a majority of active managers in nearly all major domestic and international equity categories scoreboard called Indices Versus Active Funds semi-annually to measure just this. The scoreboard tracks the performance of actively managed mutual funds as compared to theirtion relevant benchmark index. into iCandy ohs 64 of large-cap funds underperformed the S&P 500 PAST 75 of mid-cap funds underperformed the S&P MidCap 400 YEARS 63 of small-cap funds underperformed the S&P SmallCap 600 Results may fluctuate year over year but mutual funds fail to beat their benchmark over the long term. Historical Yearly Trend Fund Category All Large Cap Funds All Mid Cap Funds All Small Cap Funds Comparison Index S&P 500 S&P MidCap 400 S&P SmallCap 600 2000 36% 78% 70% 2001 57% 67% 66% 2002 61% 70% 73% 2003 64% 56% 38% 2004 61% 61% 85% 2005 44% 76% 60% 2006 69% 46% 63% 2007 44% 46% 45% 2008 54% 74% 83% 2009 50% 57% 32% 2010 65% 72% 53% HOW CONSISTENT ARE THE TOP PERFORMING MUTUAL FUNDS OVER TIME? Percentage of funds that maintained a top-half ranking over the past five years Random expectations would suggest a rate of Very few mutual funds manage to consistently repeat top-half or top-quartile performance 0.96% of large-cap funds 1.14% of mid-cap funds 6.25% 2.59% of small-cap funds HOW DO THE COST OF INDEX ETFS AND MUTUAL FUNDS COMPARE? The average mutual fund expense ratio is approximately 1.45% compared to 0.52% for the average ETF. MUTUAL VS. ETF FUND Many mutual funds also charge either a front-end or back-end An ETF tracking a broad market index can have an expense ratio as low as 0.06%. sales load, which can add up to 6% to the overall cost Mutual Fund Expense Ratio Index Benchmark ETF Expense Ratio American Funds 1.52% Vanguard S&P 500 ETF (VOO) 0.06% AMCAP C S&P 500 (AMPCX) AIM Select Equity C (AGWCX) 2.27% iShares Russell 3000 Index (IWV) 0.21% Russell 3000 Pimco Total Barclays Capital U.S. Aggregate Bond Index Schwab U.S. Return (PTTAX) 0.90% Aggregate Bond ETF (SCHZ) 0.10% On the whole, mutual funds struggle to outperform their respective benchmarks. Even the ones that shine in a given year have a slim chance of maintaining their superior rankings over time. Bottom Line: THE NUMBERS DON'T LIE Finding market-beating mutual funds may be possible but it takes a lot of research, time and luck. Factor in the high fees of active management and you have to ask yourself if playing that game is worth it. GETWHEREWITHAL.COM WHEREWITHAL Sources: - SPIVA U.S. Scorecard - S&P Persistence Scoreboard - SEC.gov - Investopedia - Motley Fool - Investment Company Institute - ETFdb.com INDICES S MUTUAL FUNDS: PERFORMANCE PUT TO THE TEST WHAT'S THE DIFFERENCE between an Index and an Actively Managed Mutual Fund? ACTIVELY MANAGED MUTUAL FUND INDEX An index is an imaginary portfolio of securities chosen to represent portions of the market. The S&P 500 is one of the most popular broad market indices measuring A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other MUTUAL FUND assets. the stock market. Although you cannot invest in an index directly, you can invest in an exchange-traded fund (ETF) or an index fund that tracks the Each share of a mutual fund ЕTF represents an investor's proportionate ownership of the fund's holdings and the gains or losses those holdings generate. performance of the index of your choice. Most index funds and ETFS rely on computer programs with little or no human input to track the index. Management costs are a fraction of typical mutual funds since there are no portfolio managers to pay. Index investing is a strategy used by investors to generate the same return as the market while minimizing costs. The portfolio manager of an actively managed mutual fund selects investments in an attempt to beat a particular performance benchmark. A market index serves as this performance benchmark. HOW DO ACTIVELY MANAGED MUTUAL FUNDS MEASURE UP TO THEIR BENCHMARKS? STANDARD &POOR'S Standard & Poor's produces a For the three years ending June 30, 2011, indices have outperformed a majority of active managers in nearly all major domestic and international equity categories scoreboard called Indices Versus Active Funds semi-annually to measure just this. The scoreboard tracks the performance of actively managed mutual funds as compared to theirtion relevant benchmark index. into iCandy ohs 64 of large-cap funds underperformed the S&P 500 PAST 3 75 % of mid-cap funds underperformed the S&P MidCap 400 YEARS 63 of small-cap funds underperformed the S&P SmallCap 600 Results may fluctuate year over year but mutual funds fail to beat their benchmark over the long term. Historical Yearly Trend Fund Category All Large Cap Funds All Mid Cap Funds All Small Cap Funds Comparison Index S&P 500 S&P MidCap 400 S&P SmallCap 600 2000 36% 78% 70% 2001 57% 67% 66% 2002 61% 70% 73% 2003 64% 56% 38% 2004 61% 61% 85% 2005 44% 76% 60% 2006 69% 46% 63% 2007 44% 46% 45% 2008 54% 74% 83% 2009 50% 57% 32% 2010 65% 72% 53% HOW CONSISTENT ARE THE TOP PERFORMING MUTUAL FUNDS OVER TIME? Percentage of funds that maintained a top-half ranking over the past five years Random expectations would suggest a rate of Very few mutual funds manage to consistently repeat top-half or top-quartile performance 0.96% of large-cap funds 1.14% of mid-cap funds 6.25% 2.59% of small-cap funds HOW DO THE COST OF INDEX ETFS AND MUTUAL FUNDS COMPARE? The average mutual fund expense ratio is approximately 1.45% compared to 0.52% for the average ETF. MUTUAL VS. ETF FUND Many mutual funds also charge either a front-end or back-end An ETF tracking a broad market index can have an expense ratio as low as 0.06%. sales load, which can add up to 6% to the overall cost Mutual Fund Expense Ratio Index Benchmark ETF Expense Ratio American Funds 1.52% Vanguard S&P 500 ETF (VOO) 0.06% АМСАР С S&P 500 (AMPCX) AIM Select Equity C (AGWCX) 2.27% iShares Russell 3000 Index (IWV) 0.21% Russell 3000 Pimco Total Barclays Capital U.S. Aggregate Bond Index Schwab U.S. Return (PTTAX) 0.90% Aggregate Bond ETF (SCHZ) 0.10% On the whole, mutual funds struggle to outperform their respective benchmarks. Even the ones that shine in a given year have a slim chance of maintaining their superior rankings over time. Bottom Line: THE NUMBERS DON'T LIE Finding market-beating mutual funds may be possible but it takes a lot of research, time and luck. Factor in the high fees of active management and you have to ask yourself if playing that game is worth it. GETWHEREWITHAL.COM WHEREWITHAL Sources: - SPIVA U.S. Scorecard - S&P Persistence Scoreboard - SEC.gov - Investopedia - Motley Fool - Investment Company Institute - ETFdb.com