ETF Store Insight

The Mutual Fund Way – Pay a Lot, Get a Little

April 26th, 2012 by Nathan Geraci

If you’ve been following our commentary, whether through our blog or on our radio show, you know that a favorite subject of ours is the underperformance of actively managed mutual funds.  In case you missed it, approximately 84% of actively managed US equity mutual funds underperformed their relative S&P benchmark in 2011.  That’s right – 84%!  Over the past three and five years, 56% and 61%, respectively, of actively managed US equity mutual funds have underperformed their benchmark.  Here’s a full chart of the carnage from SPIVA:

But wait, it gets worse.  Not only do investors get this severe underperformance with actively managed mutual funds, but they also get to overpay for this gross underperformance.  A recent article from smartmoney.com provided an excellent graphic depicting this.  The below chart from the article shows the money that five of the largest mutual funds out there is raking in from investors and more importantly, how these funds are performing (or not) relative to their competition:

If your investment advisor is putting you in these expensive, underperforming mutual funds, it’s time to ask them why.  You might be surprised by their answer.  At The ETF Store, we use inexpensive ETFs that typically deliver the benchmark performance of the asset classes we wish to invest in.  It may sound strange to some people, but we believe it’s best to avoid underperforming, expensive investment products.  As the saying goes, “A fool and his money are soon parted”….