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  • Investing For Mediocrity With ETFs

    Dear SA Readers,

    I am a novice investor so please take everything I say with a grain of salt. These are only my observations. I welcome any opinions and responses from the experienced readership of SA.

    Much has been written about the benefits of index investing. Statistics have shown that most fund managers do not beat the market. So why pay 2% in annual fees plus front-load expenses if you could invest in SPY for the same performance?

    However, the bulk of such research has been conducted on the US market. The transparency and sheer size of this market may make it difficult for fund managers to beat the index, presumably due to the efficient market hypothesis. On the other hand, things are not so clear cut with international markets. Whether it's due to a lower transparency, insider knowledge or other factors, fund managers overseas have been able to beat the index on a consistent basis.

    Based on the few examples shown below, this leads me to wonder: why are investors spending so much money to invest in mediocrity when obviously superior mutual funds are available? If such large disparities in performance were to occur with common stocks, investors would surely dump the losers confidently. Yet the allure of index investing seems to blind investors to the possibility of a consistently higher return, and the ETFs seem to have far more assets than merited by their performance. I just don't understand that. I welcome any insight into this issue.

    All data obtained from Bloomberg and google.

    Example #1:

    Aberdeen Global - Emerging Markets Equity Fund

    Market cap: 14.5B


    Vanguard MSCI Emerging Markets ETF (NYSEARCA:VWO)

    Market cap: 54B

    The mutual fund beats the index on 6 month, 1 year, 3 year and 5 year time scales. 5 year performance for the fund is about +25%, 5 year performance for the ETF is about -25%.

    Example #2:

    First State Global Umbrella PLC - China Growth Fund

    Market cap: 4.4B


    iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI)

    Market cap: 6.1B

    The mutual fund is slightly lower than the ETF at 6 months, but beats the ETF at 1 year, 3 years and 5 years. 5 year performance for the fund is about 0%, 5 year performance for the ETF is about -40%.

    Example #3:

    Allianz Europe Equity Growth

    Market cap: 6.7B


    Vanguard MSCI Europe ETF (NYSEARCA:VGK)

    Market cap: 2.7B

    The fund is even with the ETF at 6 months, but beats the ETF at 1 year, 3 year and 5 year performances. The 5Y performance for the fund is +50% and that for the ETF is about -40%.

    Tags: VWO, FXI, VGK, ETFs
    Dec 09 11:45 PM | Link | Comment!
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