This weekend, while scrolling through the various financial websites I frequent, I saw a statement that made me question my own portfolio. That statement was, "Anyone who owns mutual funds instead of ETFs is a bumbling idiot." Being that I own and prefer mutual funds to ETFs I started to wonder if I too was an "idiot."
I certainly agree that the rise in popularity of ETFs has been a good thing for individual investors. I encourage all investments that provide more access to the markets for everyone. The question is, does the performance of the ETFs hold up against mutual funds? I do not rely on words to tell us the story so I thought it would be interesting to look at the data with an apples-to-apples comparison.
In my own personal portfolio I own shares in mutual funds covering 13 different equity asset classes. Those asset classes are as follows: Large Cap Value, Mid Cap Value, Small Cap Value, Foreign Large Cap Value, Foreign Mid/Small Cap Value, Large Cap Growth, Mid Cap Growth, Small Cap Growth, Foreign Large Cap Growth, Diversified Emerging Markets, Gold & Precious Metals, Real Estate, and Broad-Basket Commodities.
Now I will examine the returns by comparing an ETF for each asset class, from its inception date, to the mutual funds I personally own. The end date for each calculated return is 10/28/2011 and the returns are:
Large Cap Value (ETF Inception Date 3-4-05)
Powershares Dynamic Large Cap Value (NYSE:PWV) +46.44%
Yacktman Focused Fund + 76.68%
Mid Cap Value (ETF Inception Date 7-2-04)
ishares Morningstar Mid Value Index (NYSEARCA:JKI) +46.32%
Perkins Mid Cap Value Fund T +64.64%
Small Cap Value (ETF Inception Date 1-30-04)
Vanguard Small Cap Value ETF (NYSEARCA:VBR) +53.54%
Allianz NFJ Small Cap Value Inst +105.05%
Foreign Large Cap Value (ETF Inception Date 8-5-05)
ishares MSCI EAFE Value Index (BATS:EFV) +13.55%
Oakmark International I +40.16%
Foreign Small/Mid Cap Value (ETF Inception Date 12-14-07)
ishares MSCI EAFE Small Cap Value Index (NYSEARCA:SCZ) -12.23%
Tocqueville International Value Fund +3.06%
Large Cap Growth (ETF Inception Date 1-30-04)
Vanguard Growth ETF (NYSEARCA:VUG) +40.74%
American Funds Grth Fnd of America F +40.14%
Mid Cap Growth (ETF Inception Date 7-20-01)
ishares Russell Midcap Growth Index (NYSEARCA:IWP) +69.93%
FBR Focus Investors Fund +219.49%
Small Cap Growth (ETF Inception Date 7-28-00)
ishares S&P Small Cap 600 Growth (NYSEARCA:IJT) +105.34%
Wasatch Small Cap Growth Fund +127.10%
Foreign Industrialized Growth (ETF Inception Date 8-5-05)
ishares MSCI EAFE Growth Index (BATS:EFG) +25.72%
William Blair International Growth N +25.84%
Diversified Emerging Markets (ETF Inception Date 4-11-03)
ishares MSCI Emerging Markets Index (NYSEARCA:EEM) +326.42%
Lazard Emerging Markets Instl +406.43%
Gold & Precious Metals (ETF Inception Date 11-19-04)
SPDR Gold Shares (NYSEARCA:GLD) +280.14%
Tocqueville Gold +244.84%
Real Estate (ETF Inception Date 2-2-01)
ishares Cohen & Steers Realty Majors (BATS:ICF) +190.31%
Cohen & Steers Realty Shares +213.29%
Broad-Basket Commodities (ETF Inception Date 7-14-06)
ishares S&P GSCI Commodity Index Trust (NYSEARCA:GSG) -15.42%
PIMCO Commodity Real Return Strategy D +22.06%
Well that didn’t turn out very well for the ETFs. Of the 13 different equity asset classes, only 1 ETF outperformed the managed mutual fund I use for the examined period of time. The rest, for the most part, severely lagged the managed mutual funds I use.
Even more eye opening is that the iShares Cohen & Steers Realty Majors ETF (ICF) came on the market on February 2, 2001. As of the close of business on October 28,2011, the ETF is up 190.31%. However, the managed Cohen & Steers Realty Shares mutual fund is up 213.29% in that same period of time. The Cohen & Steers ETF has an expense ratio of .35%, while the Cohen & Steers mutual fund has an average expense ratio of .99%. Where did you get more value for your dollar?
Clearly there is a place for the ETF. The ETF, unlike mutual funds, allows you to quickly move in and out of the markets for very little cost. The problem I have is that ETFs are now being marketed as a better long-term investment than managed mutual funds. The data simply does not support these claims. I feel there is far too much manipulation of the price of ETFs, from emotional investors and computerized trading programs, for my long-term comfort level.
To each their own I say, but I do know that cost should not replace quality for any investment. Sure I could have avoided higher expense ratios owning ETFs throughout the years, but at the end of the day, paying the higher fees has put more money in my pocket.
Disclosure: I do not own shares in any of the ETFs mentioned but my family and I do own shares in the mutual funds discussed in this article.