On May 1st, 2007 I set up hypothetical portfolios of mutual funds and ETFs and have been tracking them weekly on my blog. I picked 20 fund categories and invested funds I picked (mostly managed), Vanguard funds (mostly index), and ETFs (all index). The details are here.
My criteria for the funds I picked was pretty strict. The funds had to:
- Be available through a single brokerage (I used Etrade)
- Be open to new investors
- Be a No-Load, No-Transaction Fee fund
- Have an initial minimum investment amount of $2500 or less
- Have subsequent minimum investment amount of $100 or less
The breakdown of the 20 categories I picked was 15% bonds, 30% International Equity and 55% Domestic Equity. So I set up a three fund index portfolio with VBMFX Vanguard Total Bond, VGTSX Vanguard Total International and VTSMX Vanguard Total Stock.
I have been tracking these 4 portfolios against the S&P 500 (SPY), my brokerage and IRAs.
After one year, I have been surprised by the results. Despite the conventional wisdom that ETF's dramatically lower expenses make them a better bet than index funds and that managed funds can't keep up with index funds, the portfolios of mostly managed funds I picked are the only ones of the experimental portfolios that made money over the first year. I say the only ones because I also created a portfolio where I added one hand picked fund a month and that portfolio also went positive. The Vanguard mostly Index portfolio, ETF 20 and Three Fund Index all lost money.
In the end, the difference is not great, which makes sense given that these portfolios all invested the same amount of money in the same market categories, but I'm surprised that the Mostly Managed portfolio has done so well comparatively.
From May 1, 2007- April 30, 2008
- Mostly Managed 20 +2.18%
- Mostly Managed 12 one fund per month +1.18%
- My Brokerage +0.35%
- Three Fund Index -0.92%
- Vanguard 20 Mostly Index -0.93%
- ETF 20 -1.6%
- Combined IRAs -1.71%
- S&P 500 -5.69%
Another interesting result is that the two Vanguard portfolios returned within 0.01% of one another. They did not track each other that closely all year, but they did remain close which makes sense as the Total Market Funds are just combos of some of the individual funds in the Vanguard 20.
I invest in ETFs in my IRA but I have been surprised that as a group in a portfolio, matched category for category against Mutual Funds, they have disappointed over a 12 month period. My IRA was the worst performing diversified portfolio, due in part to containing more ETFs than Managed funds in the categories I picked and being overweight in Real Estate and Financial Companies.
I have mentioned this experiment on the forums here before and have gotten grief about not allowing enough time to pass (the last time I posted was 6 months ago). Even a year in, I imagine many will feel the time has been too short. But I always get enough good feedback here to make it worth posting about this so I'm back to say...
I understand that the average managed fund can't beat the average index fund, but is it possible that's simply because there are so many terrible managed funds out there? If you choose managed funds with reasonable expenses, no loads, and proven records of performing decently, and invest in a diverse portfolio so the inevitable funds that stumble only cause minimal damage, are managed funds a better route to take than index funds?
Had I not limited my picks to no transaction fee funds, I bet I could have picked a stronger portfolio, but the ability to DCA (dollar cost average) into the funds was more important given my desire to minimize the impact of market timing.
All the best investing!
-Wylie
