Why you’d be 47% better off buying ETFs than using a fund manager
Buying ETFs instead of investing with professionals could add 47% to your returns.
You would be better off buying a market tracking exchange-traded fund (ETF) instead of leaving your money with professionals, a new report shows.
Stockspot's report shows that investors with professional funds are going backwards in comparison with those who invest in passive ETFs.
Using the example of $10,000 invested with 10 of the most popular global funds over 5 years, they found that you would have $16,530 today.
But if you just bought an index tracking global ETF, such as IOO, you would have $21,213.
"Our research has found that investing in a simple ETF could make you 47% more money over 5 years than by investing in some of Australia's largest and most popular managed funds," Stockspot founder and CEO Chris Brycki said.
But the CEO warns investors to look into passive options.
"Not all ETFs are the same and based on our research, we recommend a simple index ETF as opposed to an active ETF. Not only do simple ETFs have lower fees, but we've seen these ETFs outperform 90% of their active ETF counterparts."
Why the big difference?
Stockspot said that lower fees are one of the main reasons ETFs tend to outperform.
A low-cost ETF will generally charge around 0.55%. But as the report states, fundies are charging their clients up to 1.70% plus performance fees. This obviously eats into returns.
Going further, Brycki points out that investing is a zero-sum game.
"For every winner, there has to be a loser, so it's no wonder the active funds lag the market returns by more and more each year," he said.
Thematics underperform
While advocating that ETFs can outperform, Stockspot also points out that not all ETFs behave in the same way, warning against thematics.
Stockspot's report states that thematic ETFs that track a particular group of companies linked to a trend or niche like cryptocurrency and oil tend to underperform the market. In fact, they lost investors more than $100 million.
"We continue to caution investors about thematic ETFs," Brycki said.
"Many of these thematic ETFs launch on an exchange to retail investors after a theme has taken off."
However, buying into a popular theme could be the worst thing for your wallet.
"Investors buy near the peak of the theme based on the hype and savvy marketing. That's generally the worst time to invest in a thematic ETF," Brycki concludes.
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