Young Research & Publishing Inc.

Investment Research Since 1978

Disclosure

  • About Us
    • Contributors
    • Archives
    • Dick Young’s Safe America
    • The Final Richard C. Young’s Intelligence Report
    • You’ve Read The Last Issue of Intelligence Report, Now What?
    • Dick Young’s Research Key: Anecdotal Evidence Gathering
    • Crisis at Vanguard
  • Investment Analysis
    • Bonds
    • Currencies and Gold
    • Dividend Investing
    • ETFs & Funds
    • Investment Strategy
    • Retirement Investing
    • Stocks
    • The Efficient Frontier
  • Investment Counsel
  • Dynamic Maximizers®
  • Retirement Compounders®
  • Free Email Signup

Mutual Funds of the Future

August 14, 2014 By Jeremy Jones, CFA

“Never pick a stock again,” proclaims the headline of a recent article by Money. The California Public Employees Retirement System is considering making cuts to its allocation of active managers. Meanwhile, robo-advisors are hawking a “new” model of investment management centered around broad based index ETFs (I’ll have more on robo-advisors in a future post).

The financial press and many more in the finance industry are hailing index based ETFs as the savior of the investing masses.

Is this the real deal? Are we finally seeing a secular shift in the money management business or is today’s infatuation with index based ETFs merely a guidepost of the stock market cycle?

A Secular Shift Toward ETFs

There is undoubtedly a secular component at play here. At Young Research, we started writing about the profound effect that exchange traded funds were likely to have on the mutual fund industry as early as 2006. We expected the ETF industry to, over time, hollow out the mutual fund industry. Exchange traded funds offered too many advantages over the fee-laden, front-end load, closet index funds that were being pushed on the public.

Over the last eight years, net inflows to equity ETFs have amounted to almost $900 billion, while open-end mutual funds have experienced net outflows of $240 billion. Investors have apparently recognized many actively managed mutual funds for what they truly are—expensive closet-index funds.

Cumulative Net Inflows

According to at least one recent study published in the Financial Analysts Journal, as much as half of all mutual fund assets are either indexed or closet indexed. And that study only looked at data through 2009. The shift toward index-based ETFs has progressed meaningfully since.

Is it any wonder investors are abandoning actively managed funds? Closet indexing is a fraud. Fund companies charge for active management, but deliver nothing of the sort. Why should investors pay the higher fees when they can buy the real deal for a fraction of the cost and get better results?

At Richard C. Young & Co., Ltd. and in our premium strategy reports we have almost completely abandoned actively managed equity funds. The problem isn’t the active management. The study I cited above also indicated that those managers who truly engaged in active management outperformed their benchmarks by more than 1% per year. The problem with actively managed funds is the fees, and the incentive for managers to closet index.

The Cyclical Component

There is also a cyclical component to today’s strong interest in index ETFs. Index investing tends to move in and out of favor with the stock market cycle. In the later stages of bull markets when a larger share of active funds tend to lag, (this is a function of both a narrowing market and lower return dispersion), indexing is held up as the only prudent approach to managing money.

I would argue we are in this stage of the cycle today. Just pull up your favorite financial news site and you are bound to see at least one article mocking those who still bother with actively managed funds. The mocking of actively managed funds by the same folk who formerly touted these funds is a useful anecdotal indicator of investor sentiment. Remember, indexing looks best late in a bull market.

The bottom line: Exchange Traded Funds are here to stay. They are the funds of the future. But today’s infatuation with index based ETFs says more about investor sentiment than it does about a shift in investor fund preferences.

Share this:

  • Email
  • Twitter
  • Facebook

You Might Also Like:

  • The Trouble with Balanced Mutual Funds and ETFs
  • The Problem With Mutual Funds Today
  • Avoid Buying Mutual Funds Doing This
  • Author
  • Recent Posts
Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #5 in CNBC's 2021 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
Latest posts by Jeremy Jones, CFA (see all)
  • Are Google, Amazon, and Microsoft About to Crash This Specialized Real Estate Market? - June 29, 2022
  • Regulators’ Bungled Attempts to Cut Emissions Drove Oil Prices Higher - June 28, 2022
  • What Happens to Your Passwords When You Die? - June 27, 2022

Search Young Research

Most Popular

  • Here’s Why You Need a 15-Year Retirement Investment Plan
  • Why Work When Taxes Take It All?
  • The Power of a Compound Interest Table
  • Is the Great Job Boom Over?
  • Are Google, Amazon, and Microsoft About to Crash This Specialized Real Estate Market?
  • What Happens to Your Passwords When You Die?
  • Regulators' Bungled Attempts to Cut Emissions Drove Oil Prices Higher
  • Your Survival Guy: Clearing the Decks, Buying a Boat, Seeing the World and More
  • Vanguard Wellesley (VWINX) vs. Wellington (VWELX): Which Fund is Best?
  • RURAL RENAISSANCE: America Finds the Country Again

Don’t Miss

Default Risk Among the Many Concerns with Annuities

Risk and Reward: An Efficient Frontier

How to be a Billionaire: Proven Strategies from the Titans of Wealth

Could this Be the Vanguard GNMA Winning Edge?

Cryptocosm and Life After Google

Warning: Avoid Mutual Fund Year End Distributions

Is Gold a Good Long-term Investment?

How to Invest in Gold

Vanguard Wellington (VWELX): The Original Balanced Fund

What is the Best Gold ETF for Investing and Trading?

Procter & Gamble (PG) Stock: The Only True Dividend King

The Dividend King of the North

You’ll Love This if You’re Dreaming of an Active Retirement Life

RSS The Latest at Richardcyoung.com

  • An Assault on America’s Central Core
  • Hillary Clinton Claws at Relevance by Publicly Insulting Clarence Thomas
  • RURAL RENAISSANCE: America Finds the Country Again
  • The Best Investment Strategy is Simple, Like Analog Music
  • RED WAVE COMING? Americans Fear the Future of Biden’s Economy
  • Biden’s Approval Lower Now than Trump’s Was after January 6, 2021
  • With a Nod from Turkey, Finland and Sweden Speed Toward NATO Membership
  • 10th AMENDMENT: Dobbs Decision a Win for States’ Rights
  • What Just Happened? Fixing Its Historic Mistake
  • Why Work When Taxes Take It All?

About Us

  • About Young Research
  • Archives
  • Contributors

Our Partners

  • Richard C. Young & Co.
  • Richardcyoung.com

Copyright © 2022 | Terms & Conditions

 

Loading Comments...
 

    loading Cancel
    Post was not sent - check your email addresses!
    Email check failed, please try again
    Sorry, your blog cannot share posts by email.