Mutual fund performance reviewKeith Lamond
Game plan for getting out of mutual funds and into ETFs: Start with Canadian dividend and U.S. equity funds.
Actively managed mutual funds in the Canadian Dividend & Income category are the most hopeless of the seven equity fund categories included in the just-issued 2014 Standard & Poor's Indices Versus Active Funds (SPIVA) analysis. In the report, not a single Canadian dividend fund outperformed the S&P/TSX Canadian Dividend Aristocrats Index over the previous five years. The three-year numbers were better – almost 26 per cent of dividend funds beat the index – but the one-year numbers show just under 7 per cent outperforming.
If actively managed mutual funds can't beat the index, then buy the index. That's the argument for index investing, where you use low-cost exchange-traded funds to track any major stock or bond index. The flaw in the SPIVA numbers is that they use pure index returns, not returns after ETF-like fees have been deducted. There's an ETF that tracks the dividend aristocrats index – it trades under the symbol CDZ – and its management expense ratio is 0.66 per cent. A few Canadian dividend funds might have outperformed the aristocrats index return minus 0.66 per cent, but the trend is still clear. Indexing beat active management.
In the U.S. equity category, just 2.8 per cent of actively managed funds outperformed the S&P 500 index (dividends included, and measured in Canadian dollars) over the previous five years. Just 3.1 per cent outperformed over the three-year period and 11.1 per cent over the past year. Here, fees are close to a non-issue thanks to fierce competition in the ETF industry. You can buy a TSX-listed S&P 500 ETF with a management expense ratio as low as 0.13 per cent or so, while funds tracking the S&P/TSX composite are as low as 0.06 per cent.
Just 20 per cent of actively managed mutual funds in the Canadian equity category beat the S&P/TSX composite index over the previous five years, compared to 38.8 per cent for the three-year period and 26 .5 per cent for the past year.
You can read the latest SPIVA report here. There's a strong case for indexing in all equity fund categories, but Canadian dividend and U.S. equity are good places to start.
Rob Carrick