Year Of The Stock Picker? Think Again

Rewind back to late 2016 and early 2017 and it is easy to find a slew of articles speculating that 2017 would be the year of stock pickers and that active managers would bounce back against passive products, such as exchange traded funds.

Sure, there are nine months remaining in 2017, perhaps enough time for trends to shift, but through the first quarter, active management continued struggling while U.S.-listed ETFs hauled in a quarterly record $135 billion in new assets.

Political And Financial Environment

“While 2017 was supposedly set up as a US stock pickers’ market — with a new President, a Federal Reserve poised to raise rates and expectations of higher stock dispersion creating opportunities to spot winners — it is not looking good so far,” said CFRA Research in a note out earlier this week. “Just 31 percent of Lipper large-cap core mutual funds ended the first quarter beating the S&P 500 index’s total return, while 33 percent of Lipper small-cap core funds bested the Russell 2000 Index.”

Passive And Active ETFs

Passive ETFs continuing to top active rivals is not all about the performance of U.S. stocks this year. Yes, the S&P 500 is up 5.5 percent year-to-date, but that is not a jaw-dropping performance. Much of the ongoing out-performance of passive ETFs over active counterparts this year is attributable to fees. Just look at the rock-bottom fees on ETFs such as the SPDR S&P 500 ETF SPY and the iShares S&P 500 Core ETF IVV.

The average expense ratio on those ETFs is less than 0.7 percent per year. As CFRA notes, the average active mutual fund charges 1.1 percent per year, or $110 on a $10,000 investment.

U.S. small-caps definitely are not setting the world on fire as highlighted by a year-to-date gain of just 1 percent for the iShares Russell 2000 Index (ETF) IWM. However, that ETF was better in the first quarter than many of its actively managed rivals.

“While a lot of the attention in the active/passive discussion resides in the large-cap style, investors in small cap funds would have been better selecting iShares Russell 2000 Index (IWM), up 2.24 percent this year than with the 1.87 percent return for the average small-cap core mutual fund,” said CFRA.

A Stock To Look At

The Vanguard Small-Cap Index Fund VB is up 1.8 percent this year. That ETF charges just 0.08 percent per year, making it cheaper than 93 percent of rival funds.

“Similar to large-cap funds, part of the challenge for investors is the high fees can be a drag, as the average small-cap core fund has a 1.27 percent net expense ratio. Further, performance success can materialize from products with middling recent records,” said CFRA.