Episode 24: Why do the majority of ETF and mutual fund managers fail to outperform their benchmarks?

The reasons are numerous but not always clear.

As a result, many investors might believe they own winning funds that will continue to beat their benchmarks or the market at large. But they might be wrong, on both counts.

Other investors might be painfully aware that their funds are underperforming but unsure what to do about it.

Every year Dimensional analyzes returns (https://www.dimensional.com/us-en/insights/the-fund-landscape) from a large sample of US-domiciled exchange-traded funds and mutual funds. Our objective is to assess the performance of fund managers relative to benchmarks.

Based on data through 2024, the evidence shows that a majority of fund managers in the sample failed to deliver benchmark-beating returns after costs. Published costs include fund expense ratios, and the data show that funds with lower expense ratios tend to perform better than those with higher expense ratios.

The same is true for funds with lower vs. higher turnover, a measure of how often holdings are bought and sold.

But this data doesn't mean investors should just own the funds with the lowest expense ratios and lowest turnover.

This approach might steer you toward index funds, which attempt to track the performance of their underlying indices in a rigid way. But one consequence is that such funds aren't necessarily focused on stocks with higher expected returns.

On the other end of the spectrum, some investors might think that paying up for a supersmart fund manager will ensure outsize returns. But the data don't support that approach either; fund managers who outperform over periods of five years tend to underperform in the next five years.

In Episode 24 of the "The Informed Investor" podcast, Dimensional's Mark Gochnour, Head of Global Client Services, Wes Crill, PhD, Senior Client Solutions Director, and Jake DeKinder, Head of Client Communications, analyze the complexities of the fund landscape to help investors assess their fund managers and determine whether their funds are getting the job done right.

LINKS FROM TODAY'S EPISODE:

The Fund Landscape

https://www.dimensional.com/us-en/insights/the-fund-landscape

"The Informed Investor" on YouTube https://www.youtube.com/playlist?list=PLCyJr6FFig-h1mA7rVP7Mbk0irFw2wA90

Dimensional Fund Advisors Shorts on YouTube https://www.youtube.com/@dimensionalfundadvisors/shorts

Mark Gochnour on LinkedIn https://www.linkedin.com/in/mark-gochnour-9a23598a/

Wes Crill on LinkedIn https://www.linkedin.com/in/wes-crill-77a49417/

Jake DeKinder on LinkedIn https://www.linkedin.com/in/jake-dekinder-cfa-4105b98/

Learn more at https://www.dimensional.com/