Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

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therockbenz
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Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by therockbenz » Sun Apr 07, 2019 11:27 am

TLDR:. Index funds only get average returns and capture 100% of every market downturn. Active managers can sell the losers. If one wants to have above average returns use a mix. "use index options for those few asset classes that are widely covered and researched and actively managed choices for all other asset classes where inefficiencies still exist."

https://www.forbes.com/sites/robertlawt ... vestments/

Another similar article from MarketWatch.

www.marketwatch.com/amp/story/guid/BBB4 ... 2E3641FE80

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by anil686 » Sun Apr 07, 2019 12:14 pm

A lot of this has been studied extensively in the past. I would encourage you to read chapter 6 of Bogle’s book common sense on mutual funds. That chapter is called on indexing and it specifically talks about some of these criticisms. What is interesting is in relatively inefficient markets, costs are much higher and it is true that superior active managers can tend to beat the market averages of those inefficient asset classes easier but the increase in costs often offsets their superiority in comparison to the average. However the under performance of active managers which is precisely of the diametric opposite dimension leads most actively managed laggards to trail in index by even more than in relatively efficient markets. That you would expect indexing to be even stronger and in efficient markets then inefficient markets. That is so counter to the relatively superficial thoughts are about indexing by many authors of these financial articles. Many of these authors think that indexing is rooted in some notion of market efficiency. But that is not the case. Indexing is rooted in cost not market efficiency. The higher the costs which are invariably higher in an inefficient market segments make indexing more powerful not less powerful in those segments.

As far as active managers being able to avoid market downturns, the data does not bear this out. The thought process is that indexing is subject to the full Force of a market downturn because it is 100% invested at all times. Active managers have a cash position what you can help them avoid the severity of a market downturn and maybe even buy additional stocks when they are on sale. Unfortunately historical data does not bear this out and it is quite the opposite as active managers typically are almost fully invested at market tops right before a crash and are heavier in cash at market bottoms instead of buying all the stocks on sale.

Hope that helps...

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by staythecourse » Sun Apr 07, 2019 12:45 pm

I'll take a different view... Who cares if I am exposed to 100% of the downturn? If I don't need to sell why does it matter? It isn't like someone has a gun to my head and says I have to sell. The great part of being 100% in on the downturn is you are guaranteed to be 100% on the upswing. Since in a capitalist society stocks have to go up it is a good bet you will be fine.

So, the important aspect of investing is NOT trying to avoid the downswing, but not having money exposed to such volatility unless you have the TIME to recover. That is what asset allocation is all about which included one's time horizon into that equation.

I have NO issues taking the beating that comes with holding stocks. I don't like it, but see nothing wrong. As the great Milton Friedman once said (paraphrasing): It is the duty for the equity investor to lose money on occasion and to do with without reproach to the investing plan. Mind you he said DUTY.

Good luck.
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by nisiprius » Sun Apr 07, 2019 1:27 pm

The usual nonsense. The author is "President of Lawton Retirement Plan Consultants, LLC, a Registered Investment Adviser with nearly a half billion in plan assets under contract," so is self-interested. The only data is cites is from a spiffy Powerpoint slide deck, designed for Fidelity advisers to put their own names on (!), before pretending to show it as their own...

Image

This isn't dispassionate exploration, this is preloaded sales ammunition, designed to counter the trend toward passive investing.

Oddly enough, many firms that focus on actively managed mutual funds have presentations showing that active beats passive.

Oddly enough, every year, S&P, which does not sell mutual funds, annually does its SPIVA report, which never shows anything of the kind.

In any case, even if their data values are accurate, I don't know why I should care about performance in narrow categories I don't have concentrated investments in. These are the categories I use, and Fidelity's claims:

US large blend (according to Fidelity, passive beat active),
Intermediate-term bond (according to Fidelity, apparently a perfect tie--only one dot is visible),
Foreign large blend (according to Fidelity, active beat passive, 59% of the time by an average of 1%).

But is their data accurate?

The SPIVA website isn't responding, so I don't have the latest, but I do have the year-end 2017 SPIVA scorecard. Compare Fidelity's data with the SPIVA report. Fidelity says that active beat passive in three out of six international stock categories. Yet S&P says:
The authors of the S&P SPIVA Scorecard wrote:
  • During the one-year period, with the exception of actively managed international small-cap equity funds, the majority of managers investing in global, international, and emerging market funds underperformed their respective benchmarks.
  • Over the 3-, 5-, 10-, and 15-year investment horizons, managers across all international equity categories underperformed their benchmarks. Furthermore, the longer the time horizon, in general, the more funds underperformed.
Image

Image
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by randomguy » Sun Apr 07, 2019 2:03 pm

therockbenz wrote:
Sun Apr 07, 2019 11:27 am
TLDR:. Index funds only get average returns and capture 100% of every market downturn. Active managers can sell the losers. If one wants to have above average returns use a mix. "use index options for those few asset classes that are widely covered and researched and actively managed choices for all other asset classes where inefficiencies still exist."

https://www.forbes.com/sites/robertlawt ... vestments/

Another similar article from MarketWatch.

www.marketwatch.com/amp/story/guid/BBB4 ... 2E3641FE80
If you want above average returns, you definitely need to use active management. Problem is that you bring in the possibility of below average returns.

https://institutional.fidelity.com/app/ ... 892930.PDF . The chart on page 11 makes a pretty convincing arguement against passive. But you have to look at how they got there. They excluded the top 25% funds. They then exclude the funds that did the worst (1/2 star funds) recently. And the time period also isn't stated from what I can tell.

If you go to fidelity and look at large cap blend funds 10 year returns, total market is 33 out of ~440 funds. 12 funds beat it by more than 1%. Your odds of picking a winner just aren't very high. Same thing in small blend (14/~225). International doesn't do as well (index is like top 1/3rd). I assume there it is easy to "win" by picking a good country. And on the downside though there are a lot more big losers:)

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by DB2 » Sun Apr 07, 2019 5:42 pm

Much of the industry despises index funds for one simple, obvious reason: they don't make anywhere near as much money on them compared to active. It's really as simple as that. This is why so much nonsense about indexing is spewed by most financial media outlets. Imagine how much more money they would make if indexing didn't exist?

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by White Coat Investor » Sun Apr 07, 2019 5:45 pm

therockbenz wrote:
Sun Apr 07, 2019 11:27 am
TLDR:. Index funds only get average returns and capture 100% of every market downturn. Active managers can sell the losers. If one wants to have above average returns use a mix. "use index options for those few asset classes that are widely covered and researched and actively managed choices for all other asset classes where inefficiencies still exist."

https://www.forbes.com/sites/robertlawt ... vestments/

Another similar article from MarketWatch.

www.marketwatch.com/amp/story/guid/BBB4 ... 2E3641FE80
Didn't read the article but I read the title and I agree with it. I'm amazed how many index funds charge 0.5% or more a year. Why pay 0.5% more than you need to?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by willthrill81 » Sun Apr 07, 2019 5:56 pm

White Coat Investor wrote:
Sun Apr 07, 2019 5:45 pm
therockbenz wrote:
Sun Apr 07, 2019 11:27 am
TLDR:. Index funds only get average returns and capture 100% of every market downturn. Active managers can sell the losers. If one wants to have above average returns use a mix. "use index options for those few asset classes that are widely covered and researched and actively managed choices for all other asset classes where inefficiencies still exist."

https://www.forbes.com/sites/robertlawt ... vestments/

Another similar article from MarketWatch.

www.marketwatch.com/amp/story/guid/BBB4 ... 2E3641FE80
Didn't read the article but I read the title and I agree with it. I'm amazed how many index funds charge 0.5% or more a year. Why pay 0.5% more than you need to?
But if you own C-class shares of the Rydex S&P 500 fund (RYSYX), the 2.33% expense ratio will make the fund's managers very happy! :wink:

It's hard to believe that that fund still has over $150 million in it. I'm really in the wrong business.
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by HawkeyePierce » Sun Apr 07, 2019 6:28 pm

willthrill81 wrote:
Sun Apr 07, 2019 5:56 pm
White Coat Investor wrote:
Sun Apr 07, 2019 5:45 pm
therockbenz wrote:
Sun Apr 07, 2019 11:27 am
TLDR:. Index funds only get average returns and capture 100% of every market downturn. Active managers can sell the losers. If one wants to have above average returns use a mix. "use index options for those few asset classes that are widely covered and researched and actively managed choices for all other asset classes where inefficiencies still exist."

https://www.forbes.com/sites/robertlawt ... vestments/

Another similar article from MarketWatch.

www.marketwatch.com/amp/story/guid/BBB4 ... 2E3641FE80
Didn't read the article but I read the title and I agree with it. I'm amazed how many index funds charge 0.5% or more a year. Why pay 0.5% more than you need to?
But if you own C-class shares of the Rydex S&P 500 fund (RYSYX), the 2.33% expense ratio will make the fund's managers very happy! :wink:

It's hard to believe that that fund still has over $150 million in it. I'm really in the wrong business.
:shock:

Had to look that up myself because I didn't want to believe such an abomination could actually exist.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Tdubs » Sun Apr 07, 2019 6:35 pm

Wasn't there a recent report that showed active funds did worse during the December downturn? In other words, they captured more than 100% of the downturn.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Wakefield1 » Sun Apr 07, 2019 6:48 pm

My index funds (and managed funds) seem to have recovered from the December panic quite nicely.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Tdubs » Sun Apr 07, 2019 6:48 pm

Check out slide 29 of the Fidelity slide show (methodology). To me, they take some liberties in the funds they throw out of their analysis.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by arcticpineapplecorp. » Sun Apr 07, 2019 7:13 pm

therockbenz wrote:
Sun Apr 07, 2019 11:27 am
TLDR:. Index funds only get average returns and capture 100% of every market downturn.
People say they don't want "average returns" because they don't want to be "average". But here's the thing. Most active fund managers underperform the market. Only 20% of active managers beat the index in any given year. Unfortunately they're not the same ones from year to year. So the longer you gamble with active management the greater your chances are of underperforming the market. So ironically, by getting the "average return" of the market, you actually wind up with "above average" returns. See here:

https://us.spindices.com/spiva/#/reports
https://web.stanford.edu/~wfsharpe/art/ ... active.htm
therockbenz wrote:
Sun Apr 07, 2019 11:27 am
Active managers can sell the losers. If one wants to have above average returns use a mix.
as anil686 stated very eloquently, the research doesn't bear this out. If you have research to prove your point please provide it. But since you said "Too Long Didn't Read" (that's what TLDR means. I had to look that up) I'm willing to bet you aren't wading through research papers to prove the point that active management can save your bacon during market downturns.

Hedge funds were always sold this way. They were sold as if they could avoid the downturns. But if this is the case, then they should have outperformed the market indexes, right? Unfortunately all the research shows that hedge funds have greatly underperformed the market over the past 15 years. See for yourself:

https://www.etf.com/sections/index-inve ... edge-funds

Hopefully this post wasn't too long for you. If you want to learn things, you're going to have to take the time to read articles/posts, think about the material/arguments put forward, look for other articles/opinions that confirm and/or oppose the original argument and then draw your own conclusions.
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by jeffyscott » Mon Apr 08, 2019 8:48 am

therockbenz wrote:
Sun Apr 07, 2019 11:27 am
Another similar article from MarketWatch.

www.marketwatch.com/amp/story/guid/BBB4 ... 2E3641FE80
That second one presents an interesting concept:
For their analysis, the researchers separated all mutual fund stock trades into two groups.

One group consisted of the trades that managers made simply because they had to, as a result of investors’ money flows into or out of their fund.
...
The second group of stock trades, however, consist of those that the managers made simply because they liked or disliked a stock.
...
It was these active trades, found the researchers, that drove the fund managers’ outperformance. “[T]he outperformance is largely driven by large active trades,” they write.

In other words, mutual fund managers would do a better job if investors would just leave them alone.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by midareff » Mon Apr 08, 2019 9:18 am

It is relatively easy to look over a very large field of categories and find a couple that meet the criteria you want to write about based on their current historical performance.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by afan » Mon Apr 08, 2019 9:53 am

midareff wrote:
Mon Apr 08, 2019 9:18 am
It is relatively easy to look over a very large field of categories and find a couple that meet the criteria you want to write about based on their current historical performance.
Exactly. And then to cook up a statement about which funds to include. Fidelity does not explain why it chose the exclusion criteria it did.
Rating filter: excludes funds with a 1-star or 2-star Morningstar rating
in the prior month. Filters are re-applied monthly at the beginning of the one-year return period for funds included.
From this it is not apparent how funds were counted or excluded. If the fund was 1 or 2 star for a month, it dropped out. After that, it is not clear when it could come back in? Next month? Next year? It is also not clear whether the calculated returns were monthly or annual. Although they say they avoided survivorship bias, they do not indicate how the fund categories were initially chosen, how many funds were in the categories over the time chosen, whether any categories were dropped or changed...

The results are equal weighted. A very strange decision if one were interested in assessing the experience of investors overall. Cap weighting would make sense for that. But if one wanted to give extra weight to highly volatile small funds, one would love equal weighting.

No discussion of risk adjustment. There is no discussion of statistical significance of the differences between the active and passive funds.
If they did what midareff suggests, there is no way to do a meaningful statistical analysis.

When the author claims Fidelity "published" this, he means "Fidelity promulgated this piece of marketing." When this so called research is accepted to the Journal of Finance, I will get interested.
Until then, read the Fama and French "Luck vs Skill" paper. Carefully done with no attempt to place a thumb on the scale for active funds.
They found that there must exist some skilled active managers in order to explain the results. But those skilled managers were lost in a sea of random bouts of good luck among unskilled managers. Thus, looking at the those with good records would yield a group of funds almost all of which were lucky rather than skilled.

This Fidelity piece is simply fluff, assuming no one will bother to read what they actually did- to the extent they will even say.
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Doc » Mon Apr 08, 2019 10:05 am

.
COSTS MATTER

If someone reliable would do an active/passive analysis with a screening criteria of only including funds with e/r's less than the category average I think that the active/passive comparison would be much different.

Additionally I think there would be a difference in the "not large blend" category.

Finding that reliable someone is a challenge.
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by willthrill81 » Mon Apr 08, 2019 10:50 am

Doc wrote:
Mon Apr 08, 2019 10:05 am
.
COSTS MATTER

If someone reliable would do an active/passive analysis with a screening criteria of only including funds with e/r's less than the category average I think that the active/passive comparison would be much different.

Additionally I think there would be a difference in the "not large blend" category.

Finding that reliable someone is a challenge.
It was my understanding research has already found that a fund's ER has had a statistically significant inverse relationship with its returns (i.e. higher ER, lower returns).
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Doc » Mon Apr 08, 2019 11:04 am

willthrill81 wrote:
Mon Apr 08, 2019 10:50 am
It was my understanding research has already found that a fund's ER has had a statistically significant inverse relationship with its returns (i.e. higher ER, lower returns).
Exactly. So if you remove the high ER funds from the universe both active and index, and then do your active/index analysis on what's left does index still beat active?

Would you buy an index fund with an ER of 1%? Most of us would not. Index be damned.
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by willthrill81 » Mon Apr 08, 2019 11:07 am

Doc wrote:
Mon Apr 08, 2019 11:04 am
willthrill81 wrote:
Mon Apr 08, 2019 10:50 am
It was my understanding research has already found that a fund's ER has had a statistically significant inverse relationship with its returns (i.e. higher ER, lower returns).
Exactly. So if you remove the high ER funds from the universe both active and index, and then do your active/index analysis on what's left does index still beat active?
Such an analysis would eliminate more active funds than index funds, so there might not be enough active funds left to make generalizable conclusions (Wellington and Wellesley are the least costly active funds I know of). I'd be willing to bet that the inverse relationship would still exist though.
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Tdubs » Mon Apr 08, 2019 11:18 am

Their methodology is so bad, I can't believe they included a methodology slide.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Spirit Rider » Mon Apr 08, 2019 11:22 am

randomguy wrote:
Sun Apr 07, 2019 2:03 pm
If you want above average returns, you definitely need to use active management. Problem is that you bring in the possibility probability of below average returns.
I fixed that for you.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by nisiprius » Mon Apr 08, 2019 11:27 am

therockbenz wrote:
Sun Apr 07, 2019 11:27 am
Another similar article from MarketWatch.

www.marketwatch.com/amp/story/guid/BBB4 ... 2E3641FE80
This, too, valid or not--obviously I think not--is old news. There was a flurry a few years back about "active share." "Active share" is a measurement of the degree to which an actively-managed mutual fund is actively managed. The key paper that coined the term and developed the measurement, was published in 2009. It is readable at no cost at How Active is Your Fund Manager? A New Measure That Predicts Performance.

Obviously, the less "active" a fund is, the closer its performance will be to the index. Obviously, the more active it is, the greater the difference. Obviously, then, in any category the best-performing mutual funds will be those with the largest active shares; equally obviously, so will the worst. The paper, to be clear, makes a much stronger claim than that. "Active share" is being widely used by fund companies to tout their active funds.

An interesting and thoughtful discussion of "active share" can be found in an article by Morningstar's Russel Kinnell, The Trouble with Active Share. Keep in mind that Morningstar is neither a fund company nor a broker.
Russel Kinnell wrote:Last month, I wrote about the predictive power of fund expense ratios. Using the success ratio (the percentage of funds that survived and outperformed), I showed that your chances of a successful outcome grow dramatically as you move to cheaper funds. Cheap funds are more than thrice as likely to survive and outperform as high-cost funds.

But what about active share? It’s a highly touted measure that determines how different a fund’s port­folio is from its benchmark. It is the inverse of overlap, so a high active share means a fund is very different and a low one indicates a fund is similar to its benchmark. For example, a fund with an active share rating of 100 relative to the S&P 500 would have no holdings in common with the index, while a fund with an active share rating of 0 would have identical holdings (such as an S&P 500 fund). Early advocates said this measure was a good predictor of future performance.

More recently, some have said that it’s OK to have high expenses if you have high active share. My response: Balderdash!...
There's a lot more to the article.

Even before "active share," it was well known that many large, active funds were "closet index funds," staying close to the index. One sensible thing that can be said is that it is crazy to pay a high expense ratio for a closet index fund. Russel Kinnell, however, says it is crazy to pay a high expense ratio, period, and most Bogleheads would agree.

Is there a wide selection of mutual funds with very low expense and high active share?
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Iridium » Mon Apr 08, 2019 12:37 pm

therockbenz wrote:
Sun Apr 07, 2019 11:27 am
"use index options for those few asset classes that are widely covered and researched and actively managed choices for all other asset classes where inefficiencies still exist."
In order words: use index funds for equities and bonds, but be actively managed in Pokemon trading cards.

I agree with this statement, but it says a lot less than it seems. Most people are invested in only the few asset classes that are widely covered and researched. You can make some arguments around the edges of whether microcaps or emerging markets are well researched (the former at least is essentially irrelevant to investors in total market funds). Real estate below a certain value almost certainly qualifies as not widely covered and researched; a professional could probably do very well against the 'mom-and-pops' playing in that segment of the market. However, the professional can't make enough money on those properties to make it worth his/her time (which is why that part of the market is ignored in the first place).

If an asset class has multiple active funds, an index, and a passive fund, wouldn't that make that asset class 'widely covered and researched'? The truly obscure stuff isn't going to have an index, much less an index fund.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by ncbubba » Mon Apr 08, 2019 12:40 pm

In the fine print (p. 29), the Fidelity paper states the data on p.11 are 1-year rolling returns. No data on longer periods (3, 5, 10 years) and no data on persistence of performance of individual funds. In other words, every year there are a certain number of active funds that outperform, but no data on whether it's the same funds this year as it was a number of years ago.
Of course index funds will capture the full drawdown, but active funds could certainly do worse than that.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Doc » Mon Apr 08, 2019 1:02 pm

willthrill81 wrote:
Mon Apr 08, 2019 11:07 am
Doc wrote:
Mon Apr 08, 2019 11:04 am
willthrill81 wrote:
Mon Apr 08, 2019 10:50 am
It was my understanding research has already found that a fund's ER has had a statistically significant inverse relationship with its returns (i.e. higher ER, lower returns).
Exactly. So if you remove the high ER funds from the universe both active and index, and then do your active/index analysis on what's left does index still beat active?
Such an analysis would eliminate more active funds than index funds, so there might not be enough active funds left to make generalizable conclusions (Wellington and Wellesley are the least costly active funds I know of). I'd be willing to bet that the inverse relationship would still exist though.
Morningstar screen for low cost small value funds:

Image


There are 33 funds that passed this screen. All but 10 have 10 year returns greater than the category average.

No index fund passed the screen.
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Oakwood42 » Mon Apr 08, 2019 1:38 pm

nisiprius wrote:
Sun Apr 07, 2019 1:27 pm
The usual nonsense. The author is "President of Lawton Retirement Plan Consultants, LLC, a Registered Investment Adviser with nearly a half billion in plan assets under contract," so is self-interested. The only data is cites is from a spiffy Powerpoint slide deck, designed for Fidelity advisers to put their own names on (!), before pretending to show it as their own...

Image

This isn't dispassionate exploration, this is preloaded sales ammunition, designed to counter the trend toward passive investing.

Oddly enough, many firms that focus on actively managed mutual funds have presentations showing that active beats passive.

Oddly enough, every year, S&P, which does not sell mutual funds, annually does its SPIVA report, which never shows anything of the kind.

In any case, even if their data values are accurate, I don't know why I should care about performance in narrow categories I don't have concentrated investments in. These are the categories I use, and Fidelity's claims:

US large blend (according to Fidelity, passive beat active),
Intermediate-term bond (according to Fidelity, apparently a perfect tie--only one dot is visible),
Foreign large blend (according to Fidelity, active beat passive, 59% of the time by an average of 1%).

But is their data accurate?

The SPIVA website isn't responding, so I don't have the latest, but I do have the year-end 2017 SPIVA scorecard. Compare Fidelity's data with the SPIVA report. Fidelity says that active beat passive in three out of six international stock categories. Yet S&P says:
The authors of the S&P SPIVA Scorecard wrote:
  • During the one-year period, with the exception of actively managed international small-cap equity funds, the majority of managers investing in global, international, and emerging market funds underperformed their respective benchmarks.
  • Over the 3-, 5-, 10-, and 15-year investment horizons, managers across all international equity categories underperformed their benchmarks. Furthermore, the longer the time horizon, in general, the more funds underperformed.
Image

Image
Great information!

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by nisiprius » Mon Apr 08, 2019 1:41 pm

Doc wrote:
Mon Apr 08, 2019 1:02 pm
Morningstar screen for low cost small value funds:

Image


There are 33 funds that passed this screen. All but 10 have 10 year returns greater than the category average.

No index fund passed the screen.
Interesting. I'll let my brand preference show and ask, why didn't Vanguard Small-Cap Value index make the cut? Which criteria didn't it meet? I'll guess that it met the criteria for style box, expense ratio, no-load funds, turnover, fund category, and "index fund." Fund manager tenure?

(And what does "distinct portfolio only" mean? OK, found it--it won't show multiple hits for different share classes of the same fund.)
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Doc » Mon Apr 08, 2019 2:09 pm

nisiprius wrote:
Mon Apr 08, 2019 1:41 pm
why didn't Vanguard Small-Cap Value index make the cut?
Nice catch Nisiprius.

It's not small cap value. :(

See Morningstar Portfolio report http://portfolios.morningstar.com/fund/ ... ture=en_US

Style Details VSIAX

Avg Market Cap USD: 3,482 Mil
Benchmark Market Cap USD 1,639 Mil
Category Avg Market Cap USD 2,744 Mil

Benchmark is Russell 2000 Value

(I use the Vanguard Russell 2000 Value ETF.)

The real question is why does nobody else use the CRSP indexes? :?:

(I chose the SCV style for my example just to see if anyone would notice that Vg doesn't meet the cut.) :twisted:
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by CurlyDave » Tue Apr 09, 2019 12:48 am

My thoughts are that when a magazine has to produce a certain number of column-inches each month, the stuff they find to fill that space can be amazingly bad...

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Ferdinand2014 » Tue Apr 09, 2019 6:27 am

willthrill81 wrote:
Mon Apr 08, 2019 10:50 am
Doc wrote:
Mon Apr 08, 2019 10:05 am
.
COSTS MATTER

If someone reliable would do an active/passive analysis with a screening criteria of only including funds with e/r's less than the category average I think that the active/passive comparison would be much different.

Additionally I think there would be a difference in the "not large blend" category.

Finding that reliable someone is a challenge.
It was my understanding research has already found that a fund's ER has had a statistically significant inverse relationship with its returns (i.e. higher ER, lower returns).
Older study from 2010, there is a newer one, but can't find it on my computer at the moment.

From Morningstar:

https://www.morningstar.com/articles/34 ... ucces.html

From the article:

"If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds."

"Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance."
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by 3funder » Tue Apr 09, 2019 6:34 am

DB2 wrote:
Sun Apr 07, 2019 5:42 pm
Much of the industry despises index funds for one simple, obvious reason: they don't make anywhere near as much money on them compared to active. It's really as simple as that. This is why so much nonsense about indexing is spewed by most financial media outlets. Imagine how much more money they would make if indexing didn't exist?
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by dwickenh » Tue Apr 09, 2019 7:50 am

arcticpineapplecorp. wrote:
Sun Apr 07, 2019 7:13 pm
therockbenz wrote:
Sun Apr 07, 2019 11:27 am
TLDR:. Index funds only get average returns and capture 100% of every market downturn.
People say they don't want "average returns" because they don't want to be "average". But here's the thing. Most active fund managers underperform the market. Only 20% of active managers beat the index in any given year. Unfortunately they're not the same ones from year to year. So the longer you gamble with active management the greater your chances are of underperforming the market. So ironically, by getting the "average return" of the market, you actually wind up with "above average" returns. See here:

https://us.spindices.com/spiva/#/reports
https://web.stanford.edu/~wfsharpe/art/ ... active.htm
therockbenz wrote:
Sun Apr 07, 2019 11:27 am
Active managers can sell the losers. If one wants to have above average returns use a mix.
as anil686 stated very eloquently, the research doesn't bear this out. If you have research to prove your point please provide it. But since you said "Too Long Didn't Read" (that's what TLDR means. I had to look that up) I'm willing to bet you aren't wading through research papers to prove the point that active management can save your bacon during market downturns.

Hedge funds were always sold this way. They were sold as if they could avoid the downturns. But if this is the case, then they should have outperformed the market indexes, right? Unfortunately all the research shows that hedge funds have greatly underperformed the market over the past 15 years. See for yourself:

https://www.etf.com/sections/index-inve ... edge-funds

Hopefully this post wasn't too long for you. If you want to learn things, you're going to have to take the time to read articles/posts, think about the material/arguments put forward, look for other articles/opinions that confirm and/or oppose the original argument and then draw your own conclusions.
You're right, but it makes my head hurt!!
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by willthrill81 » Tue Apr 09, 2019 9:58 am

Ferdinand2014 wrote:
Tue Apr 09, 2019 6:27 am
willthrill81 wrote:
Mon Apr 08, 2019 10:50 am
Doc wrote:
Mon Apr 08, 2019 10:05 am
.
COSTS MATTER

If someone reliable would do an active/passive analysis with a screening criteria of only including funds with e/r's less than the category average I think that the active/passive comparison would be much different.

Additionally I think there would be a difference in the "not large blend" category.

Finding that reliable someone is a challenge.
It was my understanding research has already found that a fund's ER has had a statistically significant inverse relationship with its returns (i.e. higher ER, lower returns).
Older study from 2010, there is a newer one, but can't find it on my computer at the moment.

From Morningstar:

https://www.morningstar.com/articles/34 ... ucces.html

From the article:

"If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds."

"Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance."
Thanks. That's exactly the conclusion I thought was reached.
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by nisiprius » Tue Apr 09, 2019 11:54 am

Doc wrote:
Mon Apr 08, 2019 2:09 pm
nisiprius wrote:
Mon Apr 08, 2019 1:41 pm
why didn't Vanguard Small-Cap Value index make the cut?
Nice catch Nisiprius.

It's not small cap value. :(
So, just to be clear on what Morningstar is doing (without asking questions about what is the "right" or the "wrong" definition or index, or whether Vanguard funds are icky poo, etc.) This really is just a question about Morningstar's mechanics, not an apologia for Vanguard.

They put the Vanguard Small Cap Value Index fund, VSIAX, in the "small value category," but describe it as having "mid value investment style..."

Image

...because it's had that style for two years...

Image

...because it's just barely over the line into the mid-cap style box:

Image

...and the screener filter said it was screening on "Fund Category" but was really screening on "current investment style."

But, did Vanguard change indexes in 2018? I know you are critical of Vanguard's fickleness with indexes, but I thought they had gone over to CRSP for almost everything at almost the same time... one news story about it is dated 2012.

So I'm assuming Vanguard adopted an index whose rules put it just barely on the right side of Morningstar's line, and that the index itself drifted. (Or, come to think of it, did Morningstar revamp the dividing lines?)
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Doc » Tue Apr 09, 2019 1:17 pm

nisiprius wrote:
Tue Apr 09, 2019 11:54 am
So, just to be clear on what Morningstar is doing (without asking questions about what is the "right" or the "wrong" definition or index, or whether Vanguard funds are icky poo, etc.) This really is just a question about Morningstar's mechanics, not an apologia for Vanguard.

...

and the screener filter said it was screening on "Fund Category" but was really screening on "current investment style."
You didn't look carefully at my screen criteria. I used both criteria.

(Equity Style Box = Small Value
and
(Fund Category = Small Value

The purpose of the post was to show a way to address the cost vs. performance relationship and how that might affect the active/index performance debate. I used a Small Value example for two reasons. 1) I overweight small value and 2) large blend is unlikely to give us much information because of the high efficiency of the style.

Turnover and load were included because they are also cost factors.

The other criteria are just used to limit the data set to something we are likely to be interested in like performance data over several periods over ten years, funds that are not in the lower 2/5ths of risk adjusted returns (my "dog killer" criteria) over multiple time periods and funds that have at least five years of consistent management and/or index bogey.

The fact that the CRSP small value category is very different than the Russell or S&P small value indexes or Morningstar's definition of categories is the another subject altogether. The changes in benchmark over a long period are I belive largely due to reducing costs. "S&P SmallCap 600 Value Index (formerly known as the S&P SmallCap 600/Barra Value Index) through May 16, 2003; MSCI US Small Cap Value Index through April 16, 2013; CRSP US Small Cap Value Index thereafter."
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by MJS » Tue Apr 09, 2019 6:15 pm

arcticpineapplecorp. wrote:
Sun Apr 07, 2019 7:13 pm
.... you said "Too Long Didn't Read" (that's what TLDR means. I had to look that up)
While TLDR does indeed expand to "Too Long Didn't Read", a more accurate translation is "Executive Summary." The original poster was giving their understanding of the article after reading it for the benefit of those who didn't want to waste time on it. Jargon, perhaps especially generational jargon, can profoundly obscure meaning!

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by BJJ_GUY » Tue Apr 09, 2019 7:24 pm

arcticpineapplecorp. wrote:
Sun Apr 07, 2019 7:13 pm
therockbenz wrote:
Sun Apr 07, 2019 11:27 am
TLDR:. Index funds only get average returns and capture 100% of every market downturn.
People say they don't want "average returns" because they don't want to be "average". But here's the thing. Most active fund managers underperform the market. Only 20% of active managers beat the index in any given year. Unfortunately they're not the same ones from year to year. So the longer you gamble with active management the greater your chances are of underperforming the market. So ironically, by getting the "average return" of the market, you actually wind up with "above average" returns. See here:

https://us.spindices.com/spiva/#/reports
https://web.stanford.edu/~wfsharpe/art/ ... active.htm
therockbenz wrote:
Sun Apr 07, 2019 11:27 am
Active managers can sell the losers. If one wants to have above average returns use a mix.
as anil686 stated very eloquently, the research doesn't bear this out. If you have research to prove your point please provide it. But since you said "Too Long Didn't Read" (that's what TLDR means. I had to look that up) I'm willing to bet you aren't wading through research papers to prove the point that active management can save your bacon during market downturns.

Hedge funds were always sold this way. They were sold as if they could avoid the downturns. But if this is the case, then they should have outperformed the market indexes, right? Unfortunately all the research shows that hedge funds have greatly underperformed the market over the past 15 years. See for yourself:

https://www.etf.com/sections/index-inve ... edge-funds

Hopefully this post wasn't too long for you. If you want to learn things, you're going to have to take the time to read articles/posts, think about the material/arguments put forward, look for other articles/opinions that confirm and/or oppose the original argument and then draw your own conclusions.
TL:DR version: Academic and rigid studies shouldn't be translated literally. Averages within silos aren't technically wrong, but in a practical sense, total portfolio performance can be misleading if everyone always thinks as if this is a game where the silos don't interact in a way that sum-of-parts isn't the whole story.... also, hedge fund analysis from that article is either weak, or misleading. I don't know the author, so benefit of doubt is he was trying to do good and tell a story consumable by the masses. Either way, no one is saying hedge funds (all strategies combined) will beat equity markets in a bull market, so why use that as the benchmark?

So...
Statistically, what can easily be proven out - and even in theory, I'm not going to argue all this. However, there is a reason the very best investors in the world (from an allocator standpoint) invest in almost entirely active managers/mandates (excepting those who deal with too much scale to do so effectively).

Basically, academic research is great and sets a nice foundation, but it is not gospel. Too often these platitudes are regurgitated as undisputed fact rather than generalized outputs based on the "average." That makes sense, because what else are researchers supposed to use, right?

Point being... I don't think it's wildly outlandish to think someone who understands enough to be on this site gets fund fees and some level of behavioral tendencies that devastate performance. Avoiding a broker-dealer, loads, and all that non-sense, I'd theorize we already avoid being in the bottom quartile of "the market" when we aggregate all our fund holdings at a personal level. Next step is fighting behavioral biases that tend to make investors experience significantly worse personal performance (money-weighted or IRR) compared to time-weighted mutual fund returns. So if one were to rebalance from relative winners to losers, and funds aren't traded like stocks - then the inconsistent quartile standings CAN (not won't) be largely nullified. This isn't a given, of course, as you'd still need to avoid being in all funds that are consistent below median performers. Point remains, it is by no means as black and white as saying funds change quartile rank over time.

Switching topics, I'll attempt to be slightly less long-winded than normal.

The section on hedge funds in the article you reference is really just a magnified version of the point I tried to make about using mutual fund 'averages'. It's misleading, potentially. This is magnified for a few reasons, but let's just stick to one, which is the HFRX isn't a great index - even among all the bad hedge fund indices out there (though during the last ten years, it's such a bad environment to be hedged, the results won't be that much different). Using averages in 'hedge funds' really does have a downward effect, which is most pronounced in diversification benefits, as they become mathematically inclined to represent more of a broad market rather than a skill-based investment seeking to generated as high a % of contribution to return from idiosyncratic rather than market explained variables. Basically, very few strong institutions - if any - have absolute return (hedge fund) allocations that a.) had as bad of returns as that index over the last ten years, and b.) have way lower correlation to equity compared to HFRX.

Finally, hedge funds aren't trying to beat equity indices. Why the heck do promoters keep trying to make their point about hedge funds while comparing to SPY? There are so many other legitimate ways to be disappointed in hedge funds over the last decade. This isn't a shot at you so much as the media being lazy in their reporting to individuals trying to educate themselves.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by arcticpineapplecorp. » Wed Apr 10, 2019 4:37 pm

BJJ_GUY wrote:
Tue Apr 09, 2019 7:24 pm

TL:DR version: Academic and rigid studies shouldn't be translated literally. Averages within silos aren't technically wrong, but in a practical sense, total portfolio performance can be misleading if everyone always thinks as if this is a game where the silos don't interact in a way that sum-of-parts isn't the whole story.... also, hedge fund analysis from that article is either weak, or misleading. I don't know the author, so benefit of doubt is he was trying to do good and tell a story consumable by the masses. Either way, no one is saying hedge funds (all strategies combined) will beat equity markets in a bull market, so why use that as the benchmark?

So...
Statistically, what can easily be proven out - and even in theory, I'm not going to argue all this. However, there is a reason the very best investors in the world (from an allocator standpoint) invest in almost entirely active managers/mandates (excepting those who deal with too much scale to do so effectively).

Basically, academic research is great and sets a nice foundation, but it is not gospel. Too often these platitudes are regurgitated as undisputed fact rather than generalized outputs based on the "average." That makes sense, because what else are researchers supposed to use, right?

Point being... I don't think it's wildly outlandish to think someone who understands enough to be on this site gets fund fees and some level of behavioral tendencies that devastate performance. Avoiding a broker-dealer, loads, and all that non-sense, I'd theorize we already avoid being in the bottom quartile of "the market" when we aggregate all our fund holdings at a personal level. Next step is fighting behavioral biases that tend to make investors experience significantly worse personal performance (money-weighted or IRR) compared to time-weighted mutual fund returns. So if one were to rebalance from relative winners to losers, and funds aren't traded like stocks - then the inconsistent quartile standings CAN (not won't) be largely nullified. This isn't a given, of course, as you'd still need to avoid being in all funds that are consistent below median performers. Point remains, it is by no means as black and white as saying funds change quartile rank over time.

Switching topics, I'll attempt to be slightly less long-winded than normal.

The section on hedge funds in the article you reference is really just a magnified version of the point I tried to make about using mutual fund 'averages'. It's misleading, potentially. This is magnified for a few reasons, but let's just stick to one, which is the HFRX isn't a great index - even among all the bad hedge fund indices out there (though during the last ten years, it's such a bad environment to be hedged, the results won't be that much different). Using averages in 'hedge funds' really does have a downward effect, which is most pronounced in diversification benefits, as they become mathematically inclined to represent more of a broad market rather than a skill-based investment seeking to generated as high a % of contribution to return from idiosyncratic rather than market explained variables. Basically, very few strong institutions - if any - have absolute return (hedge fund) allocations that a.) had as bad of returns as that index over the last ten years, and b.) have way lower correlation to equity compared to HFRX.

Finally, hedge funds aren't trying to beat equity indices. Why the heck do promoters keep trying to make their point about hedge funds while comparing to SPY? There are so many other legitimate ways to be disappointed in hedge funds over the last decade. This isn't a shot at you so much as the media being lazy in their reporting to individuals trying to educate themselves.
The author of the article I linked regarding the poor performance of hedge funds over the past 15 years is Larry Swedroe. Pretty well respected across the industry.

If hedge funds aren't betting they can beat the S&P500 then why did Protege Partners take the bet that a basket of hedge funds could beat Warren's choice of the 'ol S&P500 index?? source: https://www.google.com/search?client=fi ... or+charity

So if there's an unreal expectation out there that the hedgies will outperform the S&P500, they probably only have themselves to blame for that. After all, hedge funds used to be (still are?) mostly for sophisticated (read "wealthy") investors who can afford to lose big (they likely will investing in anything but the market). So if you were a wealthy investor wouldn't you think you could beat the dumb money that is the market (averages)??
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by BJJ_GUY » Wed Apr 10, 2019 9:17 pm

arcticpineapplecorp. wrote:
Wed Apr 10, 2019 4:37 pm

If hedge funds aren't betting they can beat the S&P500 then why did Protege Partners take the bet that a basket of hedge funds could beat Warren's choice of the 'ol S&P500 index?? source: https://www.google.com/search?client=fi ... or+charity

So if there's an unreal expectation out there that the hedgies will outperform the S&P500, they probably only have themselves to blame for that. After all, hedge funds used to be (still are?) mostly for sophisticated (read "wealthy") investors who can afford to lose big (they likely will investing in anything but the market). So if you were a wealthy investor wouldn't you think you could beat the dumb money that is the market (averages)??
Ted Seides is an opportunist. He offered the bet pre-2008 when valuations were high and other warning signs were become more clear that a downturn would eventually happen. He took the chance that his hedge fund picks would beat the index based on that very specific ten year outlook... basically he tried to time the market with a well-educated guess, knowing that even if he lost the bet - the fact that it would become public would be something he could monetize. (Think about it, how many people knew Ted or Protege before that? It was actually a brilliant PR stunt.) Also, he was winning the bet for more than half the time if not something like 6-8 of the ten years, btw.

As for hedge funds beating an equity index, it all depends on the type of fund/strategy we're talking about. There are plenty of sub-strategies that are more or less long-only mandates, and many of those do beat broad market indices over time. On the other hand, those funds aren't the kind that most refer to when making sweeping statements. Take Yale as an example: Their absolute return allocation is a bunch of funds that are truly hedged, to the point where in the aggregate they actually maintain a 0.0 beta to the market. It's silly to think a group of funds without directional market exposure is expected to beat equities during a 10 year bull market.

I meant to not indict Swedroe directly because it's pretty common to see the generalized 'hedge fund performance sucks' articles in papers, financial sites etc. My assumption is that Swedroe is well aware of this, but chose to make the comment because he knows that most hedge fund strategies have actually underperformed their expectations (benchmarked several ways depending on the group, but not against long-only equity). Assuming he is well aware of performance at a more granular level, it's hard to write that in an article for mass consumption, so he probably made the decision to use what he knew was an improper benchmark because the narrative is still relatively accurate, at least directionally.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by arcticpineapplecorp. » Wed Apr 10, 2019 9:27 pm

BJJ_GUY wrote:
Wed Apr 10, 2019 9:17 pm
Ted Seides is an opportunist. He offered the bet pre-2008 when valuations were high and other warning signs were become more clear that a downturn would eventually happen. He took the chance that his hedge fund picks would beat the index based on that very specific ten year outlook... basically he tried to time the market with a well-educated guess, knowing that even if he lost the bet - the fact that it would become public would be something he could monetize. (Think about it, how many people knew Ted or Protege before that? It was actually a brilliant PR stunt.) Also, he was winning the bet for more than half the time if not something like 6-8 of the ten years, btw.
I'm not sure about that. I'd like to see the actual details to verify this claim. Here's what I see (source: https://www.npr.org/templates/transcrip ... =688018436):
GOLDSTEIN: The first year, 2008, was a terrible year for Warren Buffett - a terrible year for the index fund. As you probably remember, that was the year of the financial crisis. The stock market, the index fund got hammered.

KESTENBAUM: Yeah, Buffett had terrible timing, right - the worst time to start this bet. By early 2009, things were looking really good for the hedge fund side - for Ted Seides.

SEIDES: We were way ahead.

KESTENBAUM: Like what to what?

SEIDES: The market would have been down about 45 percent. And the hedge funds were probably down about 25 percent...

KESTENBAUM: The next year, that was a good year for Buffett - also the year after that, also the year after that. The index fund kept beating the hedge funds. That stupid, simple investment was better than roomfuls of really smart people.

GOLDSTEIN: Where we stand now, as of the end of 2015, the index fund is up 66 percent. The hedge funds up only 22 percent.

SEIDES: It's a huge gap.

GOLDSTEIN: Like, you're not even close.

SEIDES: No. No, that's right.

source: https://www.npr.org/templates/transcrip ... =688018436
Even if Ted Beat the S&P500 for a few years as you claim (like to see the data to verify that claim)...
GOLDSTEIN: What matters, Bogle says, is how investors do over the long run. And over the long run, almost no one beats the market.

source: https://www.npr.org/2016/03/10/46989769 ... e-fund-bet
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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by BJJ_GUY » Wed Apr 10, 2019 9:54 pm

I wasn't being literal with the data of the bet Seides made. He picked a few fund-of-fund vehicles which he doesn't mention publicly, so that actual numbers are really obtainable. Still, just looking at the comment you pasted, SPY was way ahead at the end of 2015. So back of the envelope math would say that it was likely around 2013-2014 where the index pulled ahead and left the hedge funds in the dust.

I didn't actually intend to imply any take away by saying the hedge funds were ahead for several years. I was just saying that Seides was looking okay for a while, which was largely a result of him timing the market. That truly was what made him think he had the odds in his favor, not a secular bet on hedge funds vs SPY over every 10 yr period or something.

Point remains, it was a brilliant publicity stunt by Ted.

(Side note, if I recall correctly, they put the wagered amount in a long term treasury bond or fund for the duration of the 10 year bet. They made more money on that long bond than SPY and the hedge funds, I think... but I'm sure someone will fact check this regardless.)

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by Tdubs » Fri Apr 12, 2019 12:53 pm

Jason Zweig wrote a WSJ article today criticizing the Fidelity analysis. Behind a paywall, but it sounds like he has the same criticism as this thread. He must get his ideas from BH!

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by jdb » Fri Apr 12, 2019 12:59 pm

An example of why I cancelled my Forbes magazine subscription last year. Not enough time for reading conflict of interest nonsense. Good luck.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by oxothuk » Fri Apr 12, 2019 1:56 pm

For the general public, stocks and bonds are passive investments. When packaged as index funds/ETFs the general public can achieve average returns, minus a few basis points. When packaged as actively managed funds, the general public CAN achieve higher than average returns (due to luck, which is neither predictable nor repeatable) but usually will achieve lower than average returns due to the drag of higher ERs.

Very large investors (think Warren Buffett) can achieve higher than average returns, not by actively picking stocks but by actively picking COMPANIES to buy and manage. Or they can achieve lower than average returns, if their management skills are less than the incumbents of the firms they acquire. In either case, that's a whole different ballgame from what's open to most of us.

IMHO, the only other way for the general public to "beat the market" is to actively manage their own business. The classic example is rental real estate, which has a relatively low barrier to entry. Only a minority of us have the right skills and temperament for success in such ventures. The rest of us must learn to be content with average returns in passive investments, since that's the best we can do.

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by fortyofforty » Sat Apr 13, 2019 10:25 am

The only way, mathematically, for actively managed funds to beat the indexes would be if they stray outside their lanes (own securities outside the main focus of the indexes) or if individual investors as a group underperform active fund managers.

For the former, they might be able to provide value; however, investors then have less control over in what they are invested. For example, if you want to own a large cap fund and the fund dabbles in mid and small cap stocks, it might have a shot at outperforming the large cap index.

For the latter, I don't know if it's true or not. I do find it hard to believe that all those smart fund managers, with enormous research staffs and direct access to corporate management, are able to parlay that into significantly higher returns. Maybe they do.

I'll stick with indexes for the vast majority of my assets, and dabble in active funds only on the margins (like healthcare).
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by fortyofforty » Sat Apr 13, 2019 10:27 am

jdb wrote:
Fri Apr 12, 2019 12:59 pm
An example of why I cancelled my Forbes magazine subscription last year. Not enough time for reading conflict of interest nonsense. Good luck.
That goes with all those financial publications. Tripe. Maybe they present a good idea once in a while, but hard to wade through the advertisements, especially those disguised as objective articles.
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by jeffyscott » Sat Apr 13, 2019 10:58 am

Most (or at least the majority of) funds, whether index or managed, are not good investments because most funds, whether indexed or managed, charge too much.

Due to a different discussion, I looked at all domestic equity funds that Morningstar categorizes as "index". The median ER was over 0.4%. So, based on that, the majority of index mutual funds are overcharging and not worth considering. I did not look at ETFs, but would guess that at least a majority of them are also likely not worth considering based on expenses or strategy.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by willthrill81 » Sat Apr 13, 2019 11:00 am

fortyofforty wrote:
Sat Apr 13, 2019 10:27 am
jdb wrote:
Fri Apr 12, 2019 12:59 pm
An example of why I cancelled my Forbes magazine subscription last year. Not enough time for reading conflict of interest nonsense. Good luck.
That goes with all those financial publications. Tripe. Maybe they present a good idea once in a while, but hard to wade through the advertisements, especially those disguised as objective articles.
It's important to remember that media outlets like those have one superseding goal: to sell advertising space.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Thoughts on this Forbes article? "Why Most Index Funds And ETFs Are Not Good Investments"

Post by nisiprius » Sat Apr 13, 2019 11:11 am

willthrill81 wrote:
Sat Apr 13, 2019 11:00 am
...It's important to remember that media outlets like those have one superseding goal: to sell advertising space...
Tangential but related. I once asked someone whether some particularly annoying ads were actually effective at selling product, and, if not, why people ran them. He was someone who had worked at an ad agency, and he said that when he came to work there, one of the first things his boss told him is "remember that the job of an ad agency is not to sell a product to a consumer. The job of an agency is to sell an ad to a client."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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