Exchange-traded funds (ETFs) are known to have performed better than actively-managed equity mutual funds in 2022-23, as per the data of an investment research company.
Overall, there are certain differences between ETFs and actively-managed equity mutual funds, which are related to portfolio, investment and management style, objectives, costs, and the risk-return ratio.
ETFs are a collection of bonds, stocks, money market instruments, etc that an investor can buy and sell through a brokerage firm on a stock exchange. On the other hand, actively-managed equity mutual funds involve a fund manager or professional who chooses stocks and bonds and makes investment decisions on behalf of an investor.
When it comes to investment objectives, ETFs aim to mirror the investment returns of the benchmark index. Actively-managed equity mutual funds try to beat market returns vis-à-vis the respective benchmark total return index (TRI) through active portfolio management.
ETFs are passively managed funds and tend to follow no management style as such. The fund managers tend to handpick securities of the index in the same weights. Actively-managed equity mutual funds could follow a value style, growth, or blend of both depending on the type and investment mandate.
ETFs have a comparatively lower expense ratio considering there is no requirement for the active participation of fund managers. However, actively-managed equity mutual funds need the active participation of fund managers to undertake industry research, buying and selling of underlying stocks, etc.
As ETFs track the popular indices, the performance of such funds is closely in line with that of its reference benchmark index. While ETFs can outperform actively-managed mutual funds at the time of sustained rally in stock markets, they provide no flexibility to a fund manager in managing market downsides.
If the actively-managed mutual funds are generating low returns due to non-conducive economic conditions, the active fund manager has the option to choose the securities to beat the downside. However, fund managers of ETFs do not have that option and chances are that the subsequent returns could be poor during stock market downswings.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.