Blue Haven

Passively Managed ETFs Beat Out Active Stock pickers (Yet Again)

Morningstar recently presented its semi-annual update on the performance of passively managed funds and ETFs compared to actively-managed funds. Actively managed funds try to outperform the market where as passively managed funds track the return of an index like the S&P 500. For calendar year 2020, just 49% of active fund managers were able to beat a passive ETF that invests in the same areas of the market.

Active does even worse over the long term

This recent data gets placed on to the mountainous stack of existing data which shows quite clearly that most active managers fail to deliver value for their stock-picking. Instead, investors are better served by placing their money in passive, rules-based index funds and ETFs. The math, now and historically, continues to be in favor of passively managed index funds versus stock picking. In fact, if we look beyond the single year of 2020 and instead focus on 20 years worth of data, the data is overwhelmingly in favor of passive vs active:

In 10 out of 12 categories, passive index funds beat active managers more than 85% of the time! When we say we believe in passive investing strategies, it’s not based on an opinion, it’s rooted in years worth of data that says it’s the smarter way to invest.

2020 Should Have Been Their Year

If ever there was a time when active managers should have beaten passive funds it was 2020. When COVID-19 hit our shores and the pandemic took shape in the early Spring, U.S. and global stock markets were decimated. There were 30% declines in a month, a velocity almost unheard of in stock market history.

Then, almost as quickly, stocks bounced back, and continued rallying throughout the rest of the year. So on paper, active managers should have found a way to add value. The passive indexes, by definition, couldn’t do anything about the pandemic – they weren’t able to make a quick trade one way or the other. But active managers are the ones who propose to be nimble and clever enough to take advantage of market irrationality. They had their big moment to outsmart the market, and on balance, they failed.

All of this is to say, that while it might be tempting to chase the latest active manager’s performance, or mimic their trades, the data is working against you. If you want to give yourself the best odds of the highest return over time, then passively managed funds give you a greater probability of success than actively managed funds do. When it comes to investing, logic and probability are two of the factors you can think critically about, so why not use the data to your advantage? Anything more than that is usually just luck.



Leave a Reply