This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Rusty Vanneman, CFA, CMT, chief investment officer of Omaha, Nebraska-based CLS Investments.
Last year was a great year for global markets, but in relative performance terms, the average ETF surprisingly underperformed its peers if you consider data for all ETFs from every asset class against Morningstar-defined peer groups, which include mutual funds and ETFs.
However, the Morningstar numbers measure ETF performance on an equal-weighted basis. On an asset-weighted basis, accounting for larger funds in which more investors were invested in, ETFs outperformed.
There are two reasons behind the outperformance of larger ETFs. First, larger ETFs had lower costs—by about 33 basis points on average. That’s a good head start.
Second, larger ETFs, which are also generally older, tend to have a bias toward larger companies, as their holdings are most often (not always) weighted by market capitalization. That means ETFs constructed using market capitalization instead of alternative portfolio construction techniques (such as many of the new ETFs, including smart-beta ETFs) tend to have a large-cap bias.
In 2017, large companies, as defined by the S&P 500, gained 22%, while smaller companies, as defined by the Russell 2000, “only” gained 14%. Thus, funds with a large-cap bias, all else being equal, outperformed funds without.
Looking at the table below, ETFs performed even better over the three- and five-year time frames. ETFs outperformed on both an equal- and asset-weighted basis; and again, the larger funds outperformed some very impressive peer-group ranks.
ETF Provider Performance
A look at ETF providers—which ones performed well, and which ones didn’t—is also interesting. The table below lists the top seven ETF providers plus a few select ETF providers, some of which are relatively new names to the ETF markets.
For a larger view, please click on the image above.
Here are the key takeaways:
- First and foremost, ETFs generally outperformed their mutual fund cousins. Most ETFs show above-average performance versus their respective peer group averages. For instance, the five-year peer group ranks are better than just above average; they are mostly top-third if not top-quartile. Impressive.
- Second, again, larger funds generally outperformed smaller funds. Lower costs and the outperformance of larger companies relative to smaller companies both helped the larger funds.
- The top ETF providers performed well. Each has numbers to brag about in particular.
- Some firms outside top providers have great numbers, too. Fidelity and PIMCO both have some fantastic numbers and are extremely competitive with the larger firms. Other newer ETF entrants, such as J.P. Morgan, Oppenheimer, John Hancock and Hartford, also show up nicely.
In sum, ETFs had another great year in 2017, especially versus their mutual fund brethren.
CLS Investments is a third-party investment manager and ETF strategist. It began to emphasize ETFs in individual investor portfolios in 2002, and is now one of the largest active money managers using exchange-traded funds. Contact CLS’ Chief Investment Officer, Rusty Vanneman, at 402-896-7641 or at [email protected]. Please click here for a complete list of relevant disclosures and definitions.