The performance of actively managed mutual funds has been intensely scrutinized in academic literature. The seminal Carhart study found that active mutual funds, on average, underperform the market after management fees and transaction costs.1 This has resulted in a broad consensus among academics that investors should reallocate from actively managed funds to passive solutions of the broad market portfolio.2 To this end, passive investing has been facilitated and popularized by the introduction of ETFs.
The vast majority of ETFs track indices that represent active strategies
However, we believe it is premature to render conventional mutual funds obsolete. For one, not all ETFs have low costs. While the cheapest ETFs have annual expense ratios below 0.05%, others have expense ratios above 1%, making them more expensive than many mutual funds. Also, if the purpose of ETFs really was to facilitate passive investing, then just a few ETFs on the broad market portfolio would be needed, certainly not thousands. Actually, the vast majority of ETFs track indices that represent active strategies.
More importantly, not much is known yet about the realized performance of ETFs. Our research aims to fill this gap by analyzing the performance of a comprehensive, survivorship-bias-free sample of US equity ETFs. We start by examining the aggregate performance of the ETFs in our sample, similar to how the collective performance of conventional mutual funds has been evaluated in literature.
Looking at the combined performance of all ETFs allows us to assess how much the entire investment community has been better or worse off as a result of investing in ETFs. We show that the performance of ETFs is not as impressive as one might expect it to be. Investors in these ETFs have collectively realized a performance that does not appear to be much different from the performance that can be expected from conventional actively managed mutual funds.
We also perform textual and statistical analyses to sort ETFs into common investment styles, such as size, value, momentum, quality and low risk. Our research highlights that none of these smart beta ETFs has managed to consistently add value relative to a capitalization-weighted market portfolio of all US stocks. But this can be partly attributed to the generally poor performance of equity factors over the most recent part of the sample period. Conversely, anti-factor ETFs – funds with negative exposures to these styles – have either lagged the market or delivered performance that was not very different from that of the market.
Overall, we conclude that the perceived superiority of ETFs finds little empirical support in the data and that ETFs have yet to prove that they can generate better performance than conventional actively managed funds.
1 Carhart, M. 1997. “On Persistence in Mutual Fund Performance.” The Journal of Finance 52 (1): 57–82.
2 French, K. 2008. “The Cost of Active Investing.” The Journal of Finance 63 (4): 1537–1573.
This report is not available for users from countries where the offering of foreign financial services is not permitted, such as US Persons.
Your details are not shared with third parties. This information is exclusively intended for professional investors. All requests are checked.
The information contained on these pages is for marketing purposes and solely intended for Qualified Investors in accordance with the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”) domiciled in Switzerland, Professional Clients in accordance with Annex II of the Markets in Financial Instruments Directive II (“MiFID II”) domiciled in the European Union und European Economic Area with a license to distribute / promote financial instruments in such capacity or herewith requesting respective information on products and services in their capacity as Professional Clients.
The Funds are domiciled in Luxembourg and The Netherlands. ACOLIN Fund Services AG, postal address: Affolternstrasse 56, 8050 Zürich, acts as the Swiss representative of the Fund(s). UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zurich, postal address: Europastrasse 2, P.O. Box, CH-8152 Opfikon, acts as the Swiss paying agent. The prospectus, the Key Investor Information Documents (KIIDs), the articles of association, the annual and semi-annual reports of the Fund(s) may be obtained, on simple request and free of charge, at the office of the Swiss representative ACOLIN Fund Services AG. The prospectuses are also available via the website www.robeco.ch. Some funds about which information is shown on these pages may fall outside the scope of the Swiss Collective Investment Schemes Act of 26 June 2006 (“CISA”) and therefore do not (need to) have a license from or registration with the Swiss Financial Market Supervisory Authority (FINMA).
Some funds about which information is shown on this website may not be available in your domicile country. Please check the registration status in your respective domicile country. To view the RobecoSwitzerland Ltd. products that are registered/available in your country, please go to the respective Fund Selector, which can be found on this website and select your country of domicile.
Neither information nor any opinion expressed on this website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco Switzerland Ltd. product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports.