The widely held believe that Mutual Funds would provide diversification and a chance to outperform the markets has been a central theme leading to the growth of the Mutual Fund industry in previous decades. Opponents of Mutual Funds including Vanguard founder John Bogle pointed out that in fact the vast majority of mutual fund managers were not outperforming the benchmark index, the S&P 500. That lead to the concept of indexing which provided investors with a low-cost alternative to the higher priced Mutual Funds. The first Exchange Traded Fund, SPY and many of the Vanguard Index funds still hold to the same believe that investors are better off investing in a low cost index fund which should, over time, match general market returns as near as possible. Those traditional index funds still do so at very low costs compared with the typical Mutual Fund charging fees of 1% and above.
With the growth of ETFs in recent years, we have also witnesses a clear trend towards more complex and sadly also much more expensive ETFs, some of which have been entering the realm of Mutual Funds in terms of fees. Below are two lists showing the least and most expensive ETFs currently available in US markets, based on info from Yahoo! Finance.
One could go wild now in comparing actual returns in relation to the fees charge and referencing those to the general benchmark index S&P 500, something we will publish in an upcoming paper (please email us if you like some preliminary info on this). For the sake of brevity, let’s compare the least and most expensive ETFs and examine the returns versus the benchmark.
To add a bit of Schadenfreude to this week’s Senate hearings and the questioning of Goldman Sachs executives, the most expensive ETF in the list is incidentally run by Goldman Sachs. Judge for yourself how it performed compared to the least expensive ETF and the benchmark.
Yet More On ETFs
This just came in and I’d like to share these two fascinating charts, courtesy of www.etfreplay.com
The first one depicts the performance (incl. all dividends) of 3 related ETFs and their comparative returns. The 2x leveraged ETF achieves approximately double the returns whereas the 3x leveraged ETF nearly tripled the returns of the underlying. For relatively short time horizons this works well as seen below.
As you might have guessed, all things aren’t equal and certain ETFs are doing a particularly bad job in fulfilling what some brokers call the “naïve investor expectations“. The example below shows a particularly poor performance of the leveraged ETFs in comparison to the underlying. Caveat Emptor!
Good luck and good investing!
This is a guest post from FXIS Market Updates