Todd Rosenbluth is director of ETF and mutual fund research at CFRA.
While 2017 was supposedly set up as a U.S. 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.
Just 31% of large-cap core mutual funds ended the first quarter beating the S&P 500 index’s total return, while 33% of small-cap core funds bested the Russell 2000 Index.
Naturally, investors should not make a decision based on just one quarter of performance. Yet given the ongoing shift of assets to passive, the 0.61% lag in the return of the average large-cap core fund will not help to stop the asset bleeding.
Part of the underperformance stems from the 1.1% average net expense ratio for the mutual funds in contrast to a free index. However, investors in these funds could have earned a 5.92% return with the SPDR S&P 500 ETF Trust (SPY) or the iShares S&P 500 (IVV) for modest fees of 0.09% and 0.04%, respectively, and seek to replicate the index.
2017: Year For Active Management?
% of Mutual Funds Outperforming S&P 500 & Russell 2000 Indices
Source: CFRA Research
Some Cheap Funds Outperform
Not surprisingly, some of the outperforming active large-cap core funds this year—and there always are some—include products with below-average expense ratios. CFRA five-star ranked Vanguard PrimeCap Core Fund (VPCCX) and four-star American Funds Fundamental Investors (ANCFX) have 0.46% and 0.60% net expense ratios, and rose 7.44% and 6.60%, respectively, in the first quarter, ahead of the 5.49% peer average.
VPCCX outperformed its peers in the last four calendar years, and at year-end was heavily weighted toward information technology (28% of assets) and industrials (19%), such as Southwest Airlines and Texas Instruments. Unfortunately, for those seeking out strong active management, the fund is closed to new investors.