The topic is as to whether ETFs are better than mutual funds. MarketWatch reports as follows in “Actively managed funds lose share to index rivals:”
Mutual fund investors in 2008 yanked more money out of actively managed stock-funds than they put in for only the third time ever, and index-fund rivals took the spoils.
The shift reflects a budding sentiment among many investors — especially after a devastating 12 months — that active fund management isn’t always worth its higher fees. Index funds track a market benchmark and so provide average performance, typically at a much lower cost than actively run counterparts that try to beat the market on the upside and cushion blows on the downside.
Most managers fail to outperform their benchmark in a given year, however, and this unforgiving bear market is no exception. Average losses for stock-index funds last year were 39.1%, while actively managed funds lost 40.5% on average, according to investment researcher Morningstar Inc.
“Some people who get their hands burned by these market drops move from active to passive [management], and every time some of them stay there,” said Morningstar analyst Scott Burns.
As well as pocketing lower returns, Burns said investors in actively run funds are more likely to chase performance and tend to be less focused on asset allocation. As such, they are quicker to dispose of their holdings.
And chasing performance is a bad thing, while focusing on asset allocation is a good thing? Leave it up to Morningstar to (again) dispense that much garbage. They still haven’t figured out that those portfolios with fancy asset allocations got killed last year as they did in the bear market of 2000.
For a while now, they’ve been jumping on the ETF bandwagon as if ETFs are the savior of the investment world. Look at the highlighted section again and tell me this: Say, you had invested in mutual funds last year and lost 40.5%, while your “smart” neighbor had selected ETFs and “only” lost 39.1%. Do you think that he’ll be much happier than you are?
Of course not! The question, as I pointed out many times, should not be which one is better, but how you use these tools. There are times when mutual funds outperform ETFs and vice versa. Accept it and live with it. Using both in conjunction with my trend tracking methodology will allow you to select only those that are most suitable at the moment you are deploying assets in the market.
Trying to simply favor one tool over another without a clearly defined exit plan in place will only lead to uncontrollable losses as history has shown over and over again.