Mutual fund portfolio managers came under intense scrutiny in the aftermath of the global financial crisis as statistics revealed that an overwhelming majority of active portfolio managers were unable to outperform their benchmark indices over long periods. Specifically, more than 50% of active managers in the U.S. were unable to fare better than the broad U.S. Wilshire 5000 total market index even in bear markets — and especially from 2007 to 2009. These lacklustre results begged the question: Why was I placing my clients’ assets into mutual funds with higher management fees when a passive cap-weighted index-tracking ETF had a statistically significant chance of garnering better returns over time?
Of course, there always are exceptions to the rule, and some active managers do beat their benchmarks. This could certainly be the case for smaller, less liquid asset classes, such as emerging markets and preferred shares. But the reality is that most active managers with top-quartile performance one day no longer are top-quartile performers after a five-year period. Therefore, the lack of “persistent” performance using mutual funds was another compelling reason to make the transition to ETFs.