Active ETFs’ Success Scrutinized in S&P Study

Does skill lead to success when building a portfolio, be it made up of mutual funds, bonds, stocks or exchange-traded funds? Or is much of it just dumb luck? 

What if it didn’t matter?  

If one looks at a recent survey from S&P Dow Jones, neither made much difference when it comes to the performance of actively managed ETFs. 

The scorecard, which attempts to distinguish a manager’s luck from skill, is an extension of S&P DJI’s SPIVA report. One crucial standard of effective active management is whether the manager’s choices outdo their peers’ consistently.  

The answer generally, according to the report, is no, they do not. 

“Our report for year-end 2022 finds little evidence of persistent active management success, despite considering a variety of metrics and lookback periods,” said Managing Director of Index Investment Strategy at S&P Dow Jones Indices Craig Lazzara in a press release, when commenting on the U.S. Persistence Year-End 2022 Scorecard.  

“This report makes the case for selecting low-cost, broadly diversified ETFs (tax-efficient vehicles) that represent the market as a whole,” explained Joey Loss, CFP, founder of Flow Financial, in Jacksonville, Florida. He added that its findings also underline the fact that both stock picking to beat the market and picking funds that select stocks for clients is “hard,” in that investors seldom wind up with the desired results.  

Lazzara also pointed out that most active managers underperformed last year in spite of favorable circumstances and that “51% of large cap U.S. equity funds lagged the S&P 500.” 

Other findings:  

• Using a decade of data, managers with above-median results between 2013 and 2017 failed to repeat their performance between 2018 and 2022. 
• Using data from the last three years, only 5% of the above-median large cap active equity funds in 2020 remained above the median in each of the two succeeding years. If outperformance were purely random, the indexes would expect a 25% repeat rate. 
• Of 2020’s top quartile large cap funds, none continued in the top quartile for the next two years (versus 6.25% random expectation). Other fund categories repeated similar results.  
• Achieving steady value tended to be just as fleeting as consistently good peer group rankings. Active managers’ outperformance in 2020 did not predict the same results in the two years following. 
• The indexes applied similar metrics to active fixed income managers and noted comparable results. If there was success, it was unlikely to repeat. 

“From a financial planning perspective, it is important to distinguish where our expressions of agency actually result in our financial growth and help us meet our goals,” said Loss, who supports including a broadly diversified investment strategy “through thick and thin.” 

Follow Michelle Lodge on Twitter @lodgemich