FundX Converts 2 Mutual Funds to ETFs

FundX converted the final two of its actively managed mutual funds to ETFs, though the funds illustrate how equity funds often struggle to achieve long-term outperformance after fees. 

The two new funds launched on Monday. The FundX Conservative ETF (XRLX) was converted from the FundX Conservative Upgrader Fund and the FundX Flexible ETF (XFLX) was previously the FundX Flexible Income Fund. The moves complete FundX’s transition fully to ETFs after two previous fund conversions this time last year that created the FundX ETF (XCOR) and the FundX Aggressive ETF (XNAV). 

New ETFs Are Fund of Funds

Both XRLX and XFLX are fund of funds, which means that they hold other exchange-traded funds. XRLX holds a combination of stock and bond funds with a tilt toward stability, and XFLX holds a broad array of bond funds and a small allocation to low-volatility alternatives and equities. The funds are the two most risk-averse funds in FundX’s lineup compared with XCOR and XNAV.

“For years before the SEC approved conversions we would have loved to transition from mutual funds to ETFs. The reason is basically taxes and expenses. Both these funds in the form of ETFs can run more efficiently,” said Sean McKeon, one of the portfolio managers of FundX’s lineup. 

Fees Matter for Active ETFs 

XCOR’s expense ratio of 1.24% and XRLX’s of 1.71% are substantially higher than the 0.69% average for active ETFs. That average may be understating things, because it weighs funds equally in the average.

Actively managed ETF assets are concentrated in cheaper funds, with nine of the 10 biggest funds charging less than 0.69%. Those nine funds make up more than a quarter of all active ETF assets. 

Flows tell a similar, even starker, story. In the first half of 2023, active ETFs received nearly a quarter of all flows into U.S.-listed ETFs, despite making up just over 5% of ETF assets. Some 83% of those flows went to funds in the bottom fifth of funds in terms of cost. That percentage number has increased every year since 2020. 

S&P 500 Is Tough to Beat 

Funds can justify high expense ratios if they deliver outperformance net of fees. FundX’s funds show that this can be difficult, especially for stock funds. 

XRLX’s predecessor mutual fund returned 6.2% annually since its inception in 2002, compared with an 8.1% return from its benchmark, the 60/40 portfolio split between the S&P 500 and Bloomberg Aggregate Bond Index. XLFX’s mutual fund returned 3.8% since its 2002 inception, beating the Bloomberg Agg’s annual returns of 3.3%. That, however, may not be completely apples-to-apples, because the Agg is entirely a bond index, while XFLX holds a small allocation of stocks and alternative ETFs. 

The comparisons match broader trends as active bond funds have had a much better record of beating their benchmarks than stock funds. The SPIVA scorecard, which measures the percent of active funds that beat benchmark indexes after fees, found that as of the end of the second quarter, only 7.8% of large-cap stock funds beat the S&P 500 over the previous 15 years, while 26% of general bond funds beat the scorecard’s benchmark. 

Contact Gabe Alpert at [email protected]