ej76az

ETFs vs. Mutual Funds: The Long and Short (Term) Of It

Perhaps I should have said almost none. Backtesting and data mining can usually produce outliers, so I suppose if one looks hard enough one could find some tiny number of actively managed funds that outperformed their corresponding indexes, even over the long term.

I had never heard of any of the 3 funds you named. The Sequoia website is not functioning. The Legg Mason Value Trust website describes the fund as large-cap value, and the Longleaf Partners Fund website describes the fund as large- and mid-cap value. Nevertheless, both websites compare the funds to the S&P 500 Index, which is totally misleading. The long-term performance of each of these funds is comparable to that of the large-cap value index, which, as most people know, has outperformed the large cap (i.e. S&P 500) index.

In any event, there is no proven methodology for determining which actively managed mutual funds will outperform their corresponding indexes in the future. All studies of past performance show no correlation with subsequent performance (e.g., the few actively managed funds that outperformed their corresponding indexes from 1980-1990 did not do so from 1990-2000). Therefore there's no rational way to choose any actively managed fund over its corresponding index fund.

ETFs vs. Mutual Funds: The Long and Short (Term) Of It

Preposterous Statement Number One: "The active management of mutual funds serves to usually provide superior returns that outperform the market averages." Actually, no actively managed mututal fund has ever outperformeded its corresponding index over the long term, and even in the short term the overwhelming majority of actively managed mutual funds underperform their corresponding indexes.

Preposterous Statement Number Two: "While ETF’s [sic] are great instruments for generating returns and achieving diversification in the short-term, mutual fund investing can pay off over longer periods of time." Actually, ETFs have lower expenses than index mutual funds and therefore are cheaper over time, assuming you're not paying high commissions. Vanguard's website allows you to compare any mutual fund to any ETF over any time period.