Investing: Who Needs Fund Managers Anyway?

One of the articles that got recently my attention was a Bloomberg report with the headline "Funds Trail S&P 500 Index By Most Since 1997" (bloomberg). The S&P 500 (Standard & Poor’s 500 Index) is the traditional benchmark for the performance of U.S. stocks and the Wall Street.

Bloomberg reported that "equity mutual funds had their worst year since 1997 relative to the Standard & Poor’s 500 Index". Among about 4,100 funds that invest in large-cap stocks, 17 percent beat the benchmark index for U.S. equities last year, the least since the 12 percent recorded in 1997, based on data from Chicago-based Morningstar Inc. Most funds performed worse than their benchmark gauges, wrote Bloomberg.

This is not a surprise. The average of the managed funds performs generally worse than the index because they are very costly and burn a lot of money. The fund managers are usually clueless and are just gambling with the money of their clients. When the stocks fall, they get pessimistic and sell. They have to buy the shares back, when stock prices rise again. Very often they sell cheap and buy dear.

The transactions (selling & buying of stocks) add to the other costs of the fund (salaries of the fund managers, research, administration, lawyers, marketing and more). These transaction costs are paid with the money/portfolio of the clients and deteriorate the performance of the fund. To say it shortly: Managed funds are a waste of money.

Investors who want to participate in the stock market find cheaper alternatives: ETFs (Exchange Traded Funds) on indices. There are at least 2 ETFs which track the S&P 500:  The "iShares S&P 500 Index Fund" (IVV) (finance.yahoo) and the "SPDR S&P 500" (SPY) (finance.yahoo).

These funds invest only in stocks which are part of this index and they have the same structure (you can find more informations, including how the deal with dividends on the blog portal Seeking Alpha seekingalpha.com). Investors can buy & sell these ETFS on the stock market like stocks with the same transaction costs.

These ETFs are more cost-efficient than the usual (managed) funds because they save the money for research & funds manager (which they don´t need) and have less costly transactions (speculations). Who needs fund managers?