Investing's version of the super blood moon eclipse is happening right now.
In the Canadian stock market, index-tracking ETFs and index mutual funds are getting trounced by actively managed funds. This isn't just a phenomenon of the moment – active funds are looking better than the S&P/TSX composite index over a variety of time frames. You see this happening about as often as the exotic kind of lunar eclipse we experienced in late September.
Low-cost indexing investing is still a great strategy for all types of investors, but it's not invincible. It has its down moments and they must be recognized so that investors can put setbacks like we're seeing now in the right context. As of Aug. 31, the average Canadian equity fund had outperformed the S&P/TSX composite total return index over the previous one-, three- and six-month periods, and the one-, two-, three-, four-, five- and 15-year periods. Give active managers their due – they've reacted to a bear market for commodities by reducing their exposure to the energy and materials stocks that account for about 28 per cent of our stock market and by upping their holdings of strong but comparatively small sectors such as consumer staples.
For now, active managers have out-thought the market. Can it last? The question can be answered by looking at the 20-year numbers for the Canadian market. The index made 8.2 per cent, while the average Canadian equity fund made 6.6 per cent. Put more emphasis on that than one-year numbers showing the index down 8.7 per cent and the average fund down 6.9 per cent.
Further validation of indexing can be found in the U.S. market, where the S&P 500 total return index in Canadian dollars has beaten the average U.S. equity fund over every time frame to Aug. 31, from one month to 20 years. The Morgan Stanley EAFE index in Canadian dollars has similarly outperformed the average international equity fund.
Index funds are taking a hit right now in Canada, but it won't last. Stand by for the index to squirt ahead of the stock pickers.