Do You Still Invest In Mutual Funds? | Page 2 | Your stories | Discussion forum

COIN said

"Unmanaged index funds continue to be one of the best bets for equity investors. But picking the right mix of them remains a quandry."
I tend to stick with XIU and XFN.  

I agree - these are very good efs - I chose XIC instead of XIU because the MER for XIC is .06 compared to .18 for XIU. The MER for XFN is even more @ .60 so I bought the bank shares themselves instead of the financial etf.

Norman1 said

COIN said
"There aren't that many funds with a negative return over the last five years because the last five years have been good. For example, total return from S&P 500 is about +95.6% for start of 2020 to end of 2024. TSX 300 total return is about +69.1% for the same period."  

Question: How many fund managers did better than the index? If they can't beat the index, then just buy the index.

Can't buy the index. Closest is an index fund or index ETF which has tracking error, fees, and expenses. An index ETF will fail to meet or beat its underlying index too!

In reality, the index funds and ETF's place second and third quartile among other similar actively managed funds. Statistics I've seen are that actual index funds will outperform 40% to 60% of the actively managed ones.  

Back in the real world:

In 2024, few of Canada’s active funds surpassed levels set by rising global markets. Across categories, an average of over 80.0% of active funds underperformed their benchmarks, including Canadian Equity funds at 88.7%, Canadian Focused Equity funds at 80.0% and Dividend & Income Equity funds at 95.8% (see Exhibit 1 and Report 1). International Equity funds posted the lowest full-year underperformance, with 71.6% lagging the benchmark. Underperformance rates generally increased with time horizons.

https://www.spglobal.com/spdji/en/spiva/article/spiva-canada/

Typical ETFs lag index by MER, which is small. My average is under 0.1% (I mostly hold ETFs such as VTI (0.03%), VIU, ZAG and XIC (0.06%).

So, ~80–90% of active funds underperform the benchmark over 10+ years (U.S. and Canada). Typical underperformance: 1.0–1.5% per year. This adds up to a LOT of dollars over years due to compounding.

Conclusion: Passive ETFs have a massive advantage and the tracking error is a red herring.

mordko said

Back in the real world:

What I wrote is the real world. As I said, the benchmarks are theoretical and not real ETF's. Doesn't matter if the real ETF's are within 0.10% of their benchmark. Some of the mutual funds are as well after expenses. Even 0.10% makes a difference in the rankings.

The real index ETF's are not close to beating 90% of their actively managed funds. For example, iShares Core S&P/TSX Capped Composite ETF (XIC), with 0.06% MER, ranks at 19% for the 10 years ending June 30, 2025 and 26% for the 15 years ending the same.

mordko said
Worth noting that passive = more diversification = less risk. So, a typical active fund returns less $s while taking more risk. It's a double whammy.

+1

The much higher fee an active fund charges is the MAIN reason that they just can't outperform a 10bps MER index tracked ETF in the long run.

The lesson of Long Term Capital Management ("LTCM").

I never won the Nobel Prize in Economics but my stock portfolio never blew up unlike LTCM.
https://en.wikipedia.org/wiki/Long-Term_Capital_Management

Anybody know any good ETFs that kick out no income (I don't want more income) but, like real estate has been in my lifetime, only have capital gains that are realized when the ETF is sold?

If not, second option, anybody know any good ETFs that only kick out lower-taxed capital gains income (i.e. no interest or dividends income distributions)?

One will often find actively managed funds that beat some passive ones - but remember the wise adage:

"Past performance is no guarantee of future gains!"

Historical analysis of fund performance has never found any that performed better, in the long term, than the rest of the market. Unicorn funds are mostly noise in the signal.

Add to that the fact that it's virtually impossible to select the best-performing active funds compared to the relatively stable selection of index funds... and passive is less stressful.

1. Arguing that .1% of underperformance vs index makes a difference when comparing to over 1% of annual underperformance for an active fund seems like bad maths.

2. I am not sure where unlinked and unverifiable “Morningstar” claims above came from but they are false according to… Morningstar.

Our latest research evaluates the performance of Canadian Equity and global equity funds domiciled in Canada. 20% of active equity funds managed to beat the index between June 2007 and September 2024. Further, after considering a 1% fee, the number of funds that beat the index drops to just over 10%.

In other words 4 out of 5 active funds underperformed even before accounting for the fees. And the fees in Canada have been high, typically 2%. So, please stop with the obvious BS about tracking errors and MER for XIC.

Source: https://marketing.morningstar.com/content/cs-assets/v3/assets/blt9415ea4cc4157833/blt7e40debca301cb7b/68754e29b38bd1349278ff8e/The_Canadian_Conundrum.pdf

3. Morningstar may say “XIC is ranked in a universe of 300 Canadian Equity funds,” or “number of investments in the category” but the 10‑year ranking subset is far smaller. Those 300 include newer funds and are used for 3- or 5-year rankings, not the full decade window. And that number of “funds” includes quite a few ETFs.

4. When I look at XIC performance in Morningstar, it shows top 18% for 10 year and top 22% for 15 year periods. Of course that includes ETFs. XIC tracks Composite Index. Smaller stocks underperformed, so ETFs like XIU or ZCN may have done better than XIC. As opposed to active Mutual funds which routinely underperform https://www.morningstar.com/etfs/xtse/xic/performance

5. Again, we need to account for risk to compare performance properly and XIC is less risky/more diversified than active funds. Which makes their underperformance even worse. And then you get higher taxes in non-reg accounts to make an already terrible story worse again.

In my view, it is primarily retail investors stuck with bank advisors and/or full service brokerages who hold mutual funds. There is no reason for a DIYer at a discount brokerage to do so.... though I do concede the TD e-series have been an attractive option for many, especially those with smaller accounts or contributing small portions of funds at any given time.

That said, there are enough discount brokerages now with zero commissions to make the buying of any mutual fund highly questionable. There is no reason not to own a passive broad index ETF with an MER <10bp and go play golf or whatever one wishes to do.

E-series funds are great and the fees are somewhat reasonable but they are passive. They don’t help to support the following (utterly false) claim:

In reality, the index funds and ETF's place second and third quartile among other similar actively managed funds. Statistics I've seen are that actual index funds will outperform 40% to 60% of the actively managed ones.