Active Funds’ Underperformance Underscores Benefits of Passive Index ETFs

While the U.S. stock markets have enjoyed a great year, active stock managers had a hard time sticking to the winners, revealing the ongoing shortcomings of active strategies compared to passive, index-based exchange traded funds.

According to S&P Dow Jones Indices data, while the S&P 500 generated a 28.7% last year on soaring corporate profits and easy monetary policies, the benchmark outperformed 85% of U.S. large-cap active mutual funds, the Wall Street Journal reports.

The underperformance shouldn't come as a surprise as 2021 marked the 12 consecutive years that the majority of large-cap active managers failed to beat the S&P 500 benchmark.

The only difference was that the disparity between large-cap managers and the S&P 500 was particularly contrasting, with the smallest share of large-cap stock pickers actually beating the benchmark since 2014. In contrast, 60% of U.S. large-cap funds fell behind the benchmark index during the pandemic-induced market volatility of 2020.

The relative weakness in growth stocks may have contributed to the underperformance among active managers over 2021. The five highest-contributing companies accounted for only 31% of the S&P 500’s 2021 returns, or less than half that of 2020 when high-flying technology stocks took center stage.

Craig Lazzara, managing director in core product management at S&P Dow Jones Indices, argued that the narrowing performance gaps could be one factor that weighed on active managers' ability to beat the benchmark.

“The opportunity that you might have by moving to a more extreme growth posture or to a larger cap posture was much less in 2021 than it had been the prior year,” Lazzara told the WSJ.

Currently, 2022 is looking like a completely different year, with the majority of U.S. equities falling into a correction, or marking declines of at least 10% from their recent highs. Additionally, value stocks have been doing much better than their growth counterparts. Consequently, some have argued that these types of conditions with wide divides between winners and losers could be the best environment for stock pickers to shine.

“A more volatile market is in theory good for active management because there are opportunities to demonstrate their stock picking,” Todd Rosenbluth, senior director of ETF and mutual-fund research at CFRA, told the WSJ. “But historically there’s been volatile markets over the last 12 years and the data is clear: Active management has struggled.”

For more market trends, visit ETF Trends.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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