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Passive US equity funds outperform actives


While fund selectors’ preference towards index-tracking products has dropped significantly since 2015, the cheapest US equity funds often outperformed their most expensive peers.

According to Last Word Research’s latest asset class survey, pan-European fund selectors put index-tracking products in neutral sentiment in Q2 2018 and 12% were looking to decrease allocations.

Another 21% looked to increase the asset class, 41% to hold, and 27% did not use index-tracking products.

Since the beginning of the survey in 2015, selector net sentiment towards the asset class has halved.

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Source: Last Word Research

According to Morningstar, net flows for index equity funds has consistently decreased since its peak during the first half of 2017 at €63.7bn.

Since then, during July to December 2017 net flows dropped to €38bn, and further again during the first six months of 2018 at €30.1bn.

Passive funds return best

Looking at US equity fund returns passive funds tended to perform better over the three years to 31 July 2018, according to Morningstar data.

Over the three years to 31 July 2018, the average return of the cheapest funds – fees between 0% to 0.25% – was at 13.5%, compared to the most expensive funds – fees over 1% – at 11.1%.

This was also the same for returns over the five years to 31 July 2018 where the cheapest funds returned 16.6% compared to 13.9% for the most expensive.

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Source: Morningstar

When the data was further dissected, the cheapest six US equity funds which were all passive funds performed better than the most expensive US equity funds which were all active, except one (see table).

The best performing cheapest fund was Invesco S&P 500 ETF at 14.3% over the three years to 31 July 2018.

The fund allocated 25.9% towards information technology stocks, 14.1% to health care, 13.8% to financials, and 13.1% to consumer discretionary.

The most expensive fund was Crediinvest Sicav US American Value I1 USD at 4 % and was also performed the worst out of the cheapest and most expensive funds at 4%.

However, over the five years to 31 July 2018 active fund EDM International American Growth A USD was the top performer out of the cheapest and most expensive funds at 21.2%. The fund has a fee of 2.76%.

Cheapest v most expensive US equity funds

Fund name Fee (%) Total return three years to 31 July 2018 (%) Total return five years to 31 July 2018 (%)
Credit Suisse Index Fund (Lux) Equity Blue DB 0.02 13.6 N/A
Invesco S&P 500 ETF 0.05 14.3 17.02
Xtrackers MSCI USA ETF 1C 0.07 13.7 N/A
iShares Core S&P 500 ETF USD Acc 0.07 14.25 16.98
iShares S&P 500 ETF USD Distribution 0.07 14.06 16.72
Vanguard S&P 500 ETF 0.07 14.2 16.96
Vitruvius US Equity B USD 2.35 6.19 14.68
EDM International American Growth A USD 2.76 17.98 21.18
Core Series – Core US Strategy E EUR Non-Distributing 3.31 9.33 12.08
BG Selection Morgan Stanley North America Equities AX Acc 3.57 6.49 9.98
Crediinvest Sicav US American Value I1 USD 4.02 4.53 10.3

The case for active funds

Meritxell de Visa, a consultant at Barcelona-based firm Aimaser told Expert Investor that while index tracking products had advantages she preferred active funds for long-term investments.

“If the index tracking performs well, it will give the same results than the index. But after deducting the fee, you always will obtain less than the index and never more than the index,” she said.

“In the case of managed funds you have the chance to beat the market, which is not possible with the index tracking funds. Of course, you have to select the best managers and the best funds.”

de Visa noted that it was important to analyse the efficiency of the market that was being invested into.

“In the most efficient markets managed funds may have great problems in beating the market and it could be interesting to invest in an index trading fund. But I believe that when there is market turmoil managers can react faster and better to take advantage of situations.”

She said that investing in an exchange traded fund would be advantageous if the investor wanted to be in a specific sector or country where there were not any good quality managed funds to invest in.

The funds on the list were found using Morningstar that were domiciled in either Ireland or Luxembourg and had a return performance of at least three years.

Jassmyn Goh

Jassmyn reported from Sydney to New York to Jakarta before joining Expert Investor. She was most recently Features Editor at Money Management and Super Review in Sydney.

Part of the Mark Allen Group.