Active management is difficult, but can play a role


It’s hard to consistently outperform your peers because while skill plays a part in success, so does luck. It’s true whether it’s sports, where the ball has to bounce in your favor, or active management in the stock market. The Persistence Scorecard Year End 2021 recently released by S&P Dow Jones Indices provides insight into why advisors and end clients have turned to broad-market index ETFs.

While 58% of the 175 active US large-cap mutual funds that were in the first quartile in 2019 retained their high status in 2020, only 6.9% (just 12 funds) continued to do so in 2021. Investors hoping for repeat performance were better off focusing on large caps that were in the top half of the investment category in 2019, as 29% still outperformed two years later, but most did not. not completed.

In the analysis of the S&P Dow Jones Indices, the number of funds included is small, as the analysis avoided double counting of multiple share classes by using share class data with prior period performance The highest.

It’s no surprise that large-cap index ETFs in the broader market, including those tied to the S&P 500 Index, like the iShares Core S&P 500 ETFs (IVV A)the SPDR S&P500 ETFs (TO SPY A)and the S&P 500 Vanguard ETFs (VOO A)as well as those linked to other benchmarks, such as the iShares Russell 1000 ETFs (BIT A) and the Vanguard Large Cap ETFs (VV A)have gained ground in recent years.

Active management has long been believed to be more successful in small-cap land, as some teams have the ability to find hidden gems among smaller-sized, less-followed stocks. However, the data does not support this belief.

Indeed, while 57% of the 122 top quartile U.S. small-cap funds in 2019 repeated their success in 2020, a tiny 0.8% (just one) could claim the crown in 2021. The math is a bit better in expanding the universe upwards. half of the performance from 2019, as 9.4% of these funds outperformed the peer average, but nearly nine out of 10 small cap funds were unable to outperform for three consecutive years.

Small cap ETFs, including those linked to the S&P Small Cap 600 Index, such as the iShares Core S&P Small Cap ETFs (IJR A-)the iShare Russell 2000 ETFs (IWM B+)and the Vanguard Small Cap ETFs (VB A)gained momentum over the years as advisors sought alternatives to actively managed equity mutual funds.

With all of this data supporting the use of broad market index products for US equity exposure, you might be wondering if I’m the same person who wrote on this platform about the potential in general for Active equity ETFs and more narrowly constructed thematic ETFs of late. weeks. To answer: why yes, I am, and I appreciate you reading my content.

Advisors can build portfolios that combine low-cost, core equity exposure using some of the above products with active and/or thematic ETFs such as the ARK Innovation ETFs (ARKK ) and the JPMorgan Equity Prime Income (JEPI)with the aim of generating higher potential returns, while mitigating the risk of possible underperformance through the benefits of diversification.

Active and index ETFs can work together to help advisors and their clients aim for outperformance while controlling risk.

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