This ETF Has Consistently Outperformed 88% of Mutual Funds Over the Past Decade - Latest Global News

This ETF Has Consistently Outperformed 88% of Mutual Funds Over the Past Decade

It’s virtually impossible to find an ETF or mutual fund that can beat the market year after year.

This isn’t due to a lack of options. Wall Street is teeming with bright minds who are often willing to share their investing insights and strategies with everyday investors through a mutual fund. In return, they charge a small percentage of the assets you invest with them.

Unfortunately, despite their best efforts, most fund managers do not provide investors with enough returns to offset their fees. And those that do are difficult to identify at the moment and rarely beat their competitors year after year.

But an ETF can have a strong track record of returns. It is consistently in the top half of all funds; In the long run, it’s better than almost everyone else. Over the past decade, it has outperformed 88 of the major mutual funds. And there are good reasons to believe it will remain consistently better than almost any other fund on the market.

The ETF that consistently outperforms nearly 88% of mutual funds is the Vanguard S&P 500 ETF (NYSEMKT: FLIGHT).

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Image source: Getty Images.

Why it’s so hard for fund managers to outperform the S&P 500

S&P Global publishes its SPIVA scorecard (S&P Indices Versus Active) twice a year. The scorecard compares the performance of active funds with the S&P indices over periods of one, three, five, ten and 15 years. Most active funds don’t have a particularly good track record:

  • Over a one-year period, nearly 60% of actively managed large-cap mutual funds underperformed the S&P 500 after accounting for fees.

  • Over the three-year and five-year periods, the proportion of active funds with poor performance increased to 79% to 80%.

  • Over a period of 10 to 15 years, between 87% and 88% of active funds underperformed.

Active large-cap fund managers face two major challenges.

First, it is important to consider how the stock market works. For every stock someone buys, someone must be willing to sell that stock. The vast majority of stock trades, about 90%, come from large institutional investors. These are the brightest minds on Wall Street. But due to the nature of the market, not everyone can be right. And since they make up virtually the entire market, that means only about 50% of institutional investors will outperform the average.

In other words, the market for large cap stocks is very efficient and prices reflect the actual market value and all available information. It is virtually impossible for fund managers as a group to gain any meaningful advantage over the average person.

But they don’t just have to exceed performance S&P 500 or the average Joe. They have to outperform by enough to justify their fees. And that is the second challenge that fund managers face. This significantly reduces the chances of outperformance, which is also reflected in the table above.

Jack Bogle and Warren Buffett strongly warn about the impact of fees

The impact of fees on investors is not a new phenomenon. In fact, fees have fallen in recent years as it has become easier for investors to access investments and information.

Jack Bogle founded the Vanguard Group and the first-ever index fund because he recognized how fees impact the performance of the average investor. In a 1997 paper he wrote: “Investors as a group must perform below average the market because the costs of participation – primarily operating costs, advisory fees and portfolio transaction costs – represent a direct deduction from market returns.”

Warren Buffett 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 following his advice and investing in an S&P 500 index fund. However, the wealthy elite are trying to beat market returns. “My admittedly very rough calculation suggests that the elite’s search for world-class investment advice has led them to waste a total of more than $100 billion over the last decade,” he wrote to shareholders.

Buffett points out that there are fund managers who can outperform the S&P 500, but overall he thinks his estimate is conservative. Importantly, it is virtually impossible to identify a fund manager capable of outperforming before outperforming the market. You never know if a manager has immense skills that allow them to exceed their fees or if they just got lucky for a few years.

Therefore, investing in an S&P 500 index fund is the best option. With the lowest possible fees, the market return is almost achieved.

What to look for in an index fund

To reduce your costs as an investor, you just need to consider a few factors when choosing an index fund:

  • Expense ratio: This is the percentage of assets under management that you 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 that for every $10,000 you invest, you only pay $3.

  • Tracking error: The tracking error indicates how consistently (or broadly) the ETF tracks the index it is supposed to track. If your fund has a high tracking error, your returns may not accurately reflect the market as the ETF moves significantly above or below the actual index value. If you want to match market returns, look for an ETF with a low tracking error. The Vanguard S&P 500 ETF has a tracking error of about 0.02%. Once again one of the best in the industry.

If you can keep your fees low, you’ll outperform almost every 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 holds 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 and was originally published by The Motley Fool

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