Detlef Glow, head of EMEA Research at Lipper compares the performance of index trackers against that of ETFs.
Management fees seem to be an important criterion for fund selection; investors often state that exchange-traded funds (ETFs) are too expensive from their point of view, since some traditional index funds charge lower fees for tracking the same index. Fees and expenses are important, but shouldn’t an investor look as carefully at the returns delivered by the products? To me it makes a lot of sense, especially for passive products, to look more at the returns than the expenses.
A comparison of index products registered for sale in France, Germany, Switzerland, and the United Kingdom in the Lipper Global Classification sectors Equity Europe, Equity Eurozone, Equity France, Equity Germany, Equity UK, and Equity US showed there are index trackers available that have lower management fees than their respective ETFs. But how did they compare performance-wise over short-, mid-, and long-term horizons? We looked at the performance over one-year (October 1, 2014–September 30, 2015), three-year (October 1, 2012–September 30, 2015), and five-year (October 1, 2010–September 30, 2015) periods to see if there were any significant differences in the returns. To compare apples with apples the funds were grouped based on the index they track.
This comparison showed that ETFs tracking the French CAC 40 TR, the German DAX 30 TR, the U.S. S&P 500, and the European regional indices Euro Stoxx 50 NR and MSCI Europe NR outperformed their traditional peers over the one-, three-, and five-year periods.
Funds tracking the French CAC 40 NR showed a mixed picture; an index tracker showed the best performance over one year, while ETFs led the table over the three- and five-year periods.
The same pattern was shown by funds tracking the U.S. S&P 500 TR index. In contrast, two traditional index funds (UBS (CH) Inst Fund 2-Equity USA Passive I-B and ZIF Aktien USA Passiv A1) led the table for funds tracking the MSCI USA NR over the one-, three-, and five-year periods. It was remarkable that these funds didn’t show any suspicious performance patterns, i.e., the funds produced a consistent outperformance over their peers.
Equities UK seemed to be an exception from the dominance of ETFs, since traditional index funds tracking the FTSE 100 TR or the FTSE All Share TR index showed the best performance overall for the analyzed time horizons. Even though this might be seen as evidence that index trackers are the superior products for investment in U.K. equities, one needs to bear in mind that the leaders in the respective categories changed over time, and the best funds over three years profited in the ranking from the performance pattern shown for the one-year period.
Since all the funds probably apply modern portfolio management techniques, there must be another reason that traditional index funds underperform ETFs in the most analyzed market segments in this study.