ETFs
This ETF has consistently outperformed 88% of mutual funds over the past decade
Finding an ETF or mutual fund that can consistently beat the market year after year is virtually impossible.
It’s not for lack of options. Wall Street is full of sharp minds who are often willing to share their investment ideas and strategies with ordinary investors through a mutual fund. In exchange, they ask for a small percentage of the assets you invest with them.
Unfortunately, despite their best efforts, most fund managers don’t provide enough returns to investors to offset their fees. And those who do are difficult to identify in the moment and rarely beat their peers consistently, year after year.
But one ETFs has a strong track record of returns. It consistently ranks in the top half of all funds; in the long run, it’s better than almost all. It has beaten 88 large-cap mutual funds over the past 10 years. And there’s good reason to expect it to remain consistently better than almost any fund available.
The ETF that consistently outperforms nearly 88% of mutual funds is the Vanguard S&P 500 ETF (NYSEMKT:VOO).
Image source: Getty Images.
Why it’s so hard for fund managers to outperform the S&P 500
Global S&P publishes its SPIVA (S&P Indices Versus Active) dashboard twice a year. The dashboard compares the performance of active funds to S&P indexes over periods of one, three, five, 10 and 15 years. Most active funds don’t have a great track record:
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Over a one-year period, nearly 60% of actively managed large-cap mutual funds underperformed the S&P 500 after accounting for fees.
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Over three- and five-year periods, the percentages of underperforming active funds increased from 79% to 80%.
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Over 10 and 15 years, between 87% and 88% of active funds have underperformed.
Active large-cap fund managers face two big challenges.
First, it is important to consider how the stock market works. For every stock a person buys, someone must be willing to sell that stock. The vast majority of stock trades, around 90%, come from large institutional investors. These are the smartest minds on Wall Street. But, given the nature of the market, they can’t all be right. And since they make up almost the entire market, that means only about 50% of institutional investors will outperform the average.
In other words, the large-cap stock market is very efficient, with prices reflecting true market values and all known information. It is virtually impossible for money managers, as a group, to have a significant advantage over the average person.
But they must not only surpass S&P500 or the average Joe. They need to outperform enough to justify their fees. And this is the second challenge facing fund managers. This significantly reduces the chances of outperformance, as reflected in the table above.
The story continues
Jack Bogle and Warren Buffett warn about the impact of fees
The impact of fees on investors is not a new phenomenon. In fact, fees have decreased in recent years as it has become easier for investors to access investments and information.
Jack Bogle started the Vanguard Group and the first-ever index fund because he saw the impact of fees on the performance of the average investor. In a 1997 article, he wrote: “Investors as a group must underperform the market because the costs of participation – largely operating expenses, advisory fees and portfolio transaction costs – are a direct deduction from the market return. »
Warren Buffett has also repeatedly warned about fees in his letters to Berkshire Hathaway shareholders. In 2017, he noticed that many of his friends of modest means were heeding his advice and investing in an S&P 500 index fund. The wealthy elite, however, seek to outperform market returns. “My calculation, albeit very rough, is that the elite’s pursuit of superior investment advice has caused them to waste, in total, more than $100 billion over the past decade,” he said. he writes to shareholders.
Buffett notes that there are fund managers who can outperform the S&P 500, but overall he believes his estimate is conservative. It is important to note that it is virtually impossible to identify one of these fund managers who can outperform before outperforming the market. You never know if a manager has immense skills that allow him to outperform his fees or if he just got lucky for a few years.
Therefore, the best option is to invest in an S&P 500 index fund. This will almost match market returns with the lowest possible fees.
What to look for in an index fund
There are just a few factors to consider when selecting an index fund to reduce your costs as an investor:
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Spending rate: This is the percentage of assets under management that you will pay to the fund manager. The Vanguard S&P 500 ETF has an expense ratio of just 0.03%, one of the lowest in the industry. This means you will only pay $3 for every $10,000 you invest.
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Tracking error: Tracking error tells you how consistently the ETF tracks the index it is intended for. If your fund has high tracking error, your returns may not exactly match those of the market because the ETF moves well above or below the true value of the index. If you want to match market returns, look for an ETF with low tracking error. The Vanguard S&P 500 ETF has a tracking error of approximately 0.02%. Once again, one of the best in the industry.
If you can keep your fees low, you’ll outperform almost any active mutual fund on the market. And that’s exactly what you can do with the Vanguard S&P 500 ETF.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
This ETF has consistently outperformed 88% of mutual funds over the past decade was originally published by The Motley Fool