ETF's, instruments of diversification.
Updated: Jan 8, 2021
Preliminaries :
Since years, investors are used to select and buy Mutal Funds as instruments of diversification. A lot of products are available in the market but only a few that beat their benchmark on a long run. Thankfully for us, S&P and Moody's are thanks for us the gatekeepers of the mutual funds temple. They allow each investor to compare the performances of different fund houses in the market jungle.You can use their services to protect yourself from the subjectivity of your banker and help you to identify and find the best funds.
..but how many funds beat the markets? A recent study shows that only 24% outperform the market on a 10 year time frame. Yes not so good indeed !!
Why?
The study mentioned above details that active managers earn on average 0.12% higher annual returns than ETF's before fees, but they charge an average fee of 1.07%, which is much higher than the average index fee of only 0.15%. The result is that active investors are left with 0.80% less than ETF's investors despite their manager earnings superior returns.
So, concretely what's an ETF ?
"An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold"
Let's compare ETFs vs Mutual Funds:
This table seems very clear, and explains how favorable an investment in an ETF can be compared to Mutual Funds..and on the top of the advantages for a personal investor, the fees.
Now, what does the ETF market represent in terms of volume :
.. yes an amazing growing market since the year 2000 !
And versus Mutual Funds?
This very relevant table shows that the ETF market is progressively taking market share versus active funds (mutual funds).
Is that the sign of the end for Mutual Funds ?
To answer that existential question I'll give you a relevant example. I remember a meeting with Mark Mobius (@MarkMobius) fund manager expert in Emerging Markets at Franklin Templeton. It was during a conference he gave in Brussels near Grand-Place. Mark, a real adept of facts and figures, explained to us that after having analysed all the data of a company he was resolute to invest! But figures are not everything..and Mobius decided to meet the CEO and CFO from that manufacturing company. He told us that he was positively surprised about the potential and the low level of debt of that company. Then Mobius asked them to visit...the warehouse. A new surprise awaited him. After investigation he discovered that the company wasn't able to empty his supplies. The figures didn't show that. He decided not to invest in that company. Do you remember that other expample showed in the previous investment tips, ETF's will never invest in start-ups like Microsoft or non listed stocks like Fidelity did. That's what makes the difference between active investments through mutual funds and passive investments through ETF's.
How useful could ETF's be in an investment strategy?
It's the opportunity for portfolio managers to manage portfolios independently and actively through their quantitative analyses. Portfolio managers can invest objectively in diversified portfolio's by following the valuation of the market. Example : If your portfolio manager is positive about Europe but he doesn't want to waste time analyzing every single stock in the INDEX, he will invest directly in the EUROSTOXX50 or MSCI EUROPE.
Conclusions:
As you can read it in this article, Mutual funds are still the first diversified investment vehicle in the world but they are constantly losing market share since 15 years. Does it mean that we have rang the end of the mutual fund era? Probably not, and in every changing world the most adaptative and best element will survive. ETF's represent good solutions for personal investors due to a lower level of fees and thanks to their long time performance. Moreover, portfolio managers can use those passive investment in an active way by using them in a portfolio strategy.
If you want to know more about this topic don't hesitate to take contact with me.....the materials in attachment are also a good introduction to those new investment instruments.
Talk to you soon ... Sébastien Van Passel
Follow me on Twitter : @sebvanpassel
Sources:
http://www.moneyobserver.com/how-to-invest/tracker-funds-versus-etfs
http://www.nerdwallet.com/blog/investing/2013/active-mutual-fund-managers-beat-market-index/
https://www.fidelity.com/viewpoints/investing-ideas/mutual-fund-or-etf?
http://www.investopedia.com/articles/mutualfund/05/etfindexfund.asp
http://www.usatoday.com/story/money/markets/2014/03/29/warren-buffetts-good-advice-applied-to-3-etfs/7032087/
http://www.investopedia.com/terms/e/etf.asp
http://www.thedigeratilife.com/blog/index.php/2009/07/09/investing-money-in-stocks-mutual-funds-etfs/
http://awealthofcommonsense.com/investors-arent-always-irrational/
http://www.thisismoney.co.uk/money/investing/article-2738966/How-use-CAPE-beat-market-global-CAPE-values.html
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