Since actively managed mutual funds keep cash on hand to be able to meet daily customer redemptions, conventional wisdom holds that mutual funds should outperform index funds and ETFs in down markets because the cash acts as a cushion when there is a falling market.
That didn’t happen last year. As Jane Bryant Quinn of Bloomberg explains – in fact, 58% of all actively managed funds lost more in value than the benchmark against which they measure themselves. (Remember that the fund companies themselves get to choose the benchmark they want to be measured by). Small-cap managers did much worse – 72% of them missed their self selected benchmark.
According to Quinn, the benefits of ETFs – lower costs, lower taxes – combined with their outperformance in a down market, have them “going in for the kill” against actively managed mutual funds.
