ETF or mutual fund? Six tips for making the right choice
More and more investors swear by low-cost index funds. But that does not mean that actively managed funds have no future. How should you choose, and what can we learn from award-winning funds?
On Thursday, De Tijd & L'Echo presented awards for the 30th consecutive year to the best-performing investment funds on the Belgian market. In recent years, they have generally managed to outperform the benchmark index. However, the number of funds performing better than the index remains globally in the minority, and past performance offers no guarantee for the future. Nevertheless, the winners offer some lessons that can help you select an actively managed fund.
1. Determine what you want to invest in
Biennial research reports from S&P and Morningstar show that it is easier to beat the market in some categories than in others. The Morningstar report shows that 11.4 percent of actively managed equity funds outperformed their market over the past ten years. For active bond funds, that percentage stood at 31.5 percent over the same period.
Differences also increase within those categories. Among funds that invest exclusively in US large caps—shares of companies with a very large market capitalization—not a single fund outperformed the index over a ten-year period. Among Chinese equity funds, on the other hand, nearly half performed better. Therefore, in the first category, you might be better off with an ETF, a passively managed investment fund that mimics the performance of an index and is traded on the stock exchange. However, in the second category, you can benefit by choosing an actively managed fund.
No general rule can be derived from success rates, but generally, active management performs better in less efficient markets where fewer analysts follow stocks. Active management also performs better in highly concentrated markets where index heavyweights underperform.
Emerging markets are a good example of often less efficient markets. American bond specialist Pimco won a Tijd Award this year in the emerging market bonds category primarily by exploiting inefficiencies in less-followed segments of emerging markets.
'Today, there are already more than 80 countries in which one can invest in the emerging market bond category. That is more than a doubling in a few decades,' says Pimco. 'Moreover, the number of investable bonds has increased twentyfold over the same period. The supply is therefore enormous. Thanks to our large team, we can take many more smaller positions. Smaller teams face the limitation that they have to focus on the countries they know better.'
2. Avoid huggers
Regardless of the category in which you wish to invest, avoid "cuddlers." These are funds that barely deviate from their benchmark index. While these funds may offer comparable gross returns to their passive counterparts, after costs, you are better off with the cheaper trackers. ETFs are always the best choice in this regard.
You can recognize index huggers in various ways. For many funds, you will find the 'active share' on the product sheet. This is a percentage that indicates the extent to which the fund deviates from the index. The higher the percentage, the more active the fund. Lazard Emerging Markets Equity, winner of the award in the emerging market equity category, for example, has an active share of 81 percent. This means that the fund has only 19 percent overlap with the index.
If the active share is not listed on the fact sheet, you can also compare the fund's ten largest positions with those of the index. If there are few differences, you are likely dealing with a 'cuddler'.
It is also striking that truly active managers often dare to take pronounced positions (conviction), investing in only a limited number of positions. These are then given a relatively large weighting, meaning that the ten largest positions quickly account for more than 30 percent of the fund. Of the five equity funds that won an award, three invested in only 50 to 60 stocks.
Incidentally, deviating from the index does not necessarily require a concentrated portfolio. Even highly diversified portfolios can deviate significantly from the index. We see this more often with fixed-income funds. Rothschild & Co Asset Management, which was the winner in the euro corporate bonds category, holds no fewer than 313 positions in its winning fund.
3. Pay attention to the costs
An important criterion when choosing between a fund and an ETF is the costs. The more fees active funds charge, the higher their return must be to come close to the return of the tracker after those costs. Therefore, caution is advised with funds whose recurring annual costs mount up sharply.
Although there are exceptions that prove the rule. Indépendance Europe Small, a fund that invests in European small-caps and is managed by the French Indépendance AM, charges 2.11 percent in annual fees. However, the fund's performance after those fees is solid. Over 5 years, it achieved an average return of 18.5 percent per year, while the benchmark index achieved a return of 5.3 percent per year over the same period. You should therefore view the costs in relation to the performance presented by the funds. Moreover, recurring annual costs are automatically included in the funds' net asset values, and thus in the returns they display.
4. Avoid cowboys
Return is one thing; the risk fund managers take to achieve that return is another. A good way to look at that risk is how the fund performs in bad market years. It is also a criterion for awarding the prizes. Those who wish to conduct this research themselves can simplify the exercise by looking at the fund's performance in a crisis year. If it performs significantly worse than the benchmark index in such a year, it generally means that you are dealing with a fund that takes more risk or employs a riskier style.
Pimco Income Fund, a globally diversified bond fund, for example, pays close attention to risk control. In 2022, it hedged very well against the sharp rise in interest rates that occurred in the United States, among other places, at that time. While the benchmark index lost 13 percent that year, the fund was able to limit the damage to 7.5 percent.
Volatility, which is often included in the fund fact sheets, is also an indication of the risk the fund takes. The higher the volatility and the more it deviates from that of the reference index, the greater the price fluctuations and therefore the greater the risk.
Preferably choose managers with a disciplined investment process, whereby emotions are eliminated, regardless of what happens on the markets. As an investor, it is not obvious to what extent a manager possesses this quality based on the investment policy alone, but sometimes it is self-evident. In the European equities category, a quantitative fund from BNP Paribas Asset Management was the winner. Quantitative funds are funds composed based on mathematical models. Emotions are therefore eliminated.
5. Opt for dedicated administrators
Managers who invest in their own funds show greater commitment than managers who do not. Unfortunately, there is no European obligation for managers to report on this. Consequently, investors are usually unaware of it. Of the 14 award-winning funds, no fewer than nine have managers who invest in their own funds, according to a survey. At Mercier Van Lanschot, the winner in the mixed funds category, this 'skin in the game' is even crucial. "We attach great importance to our 'investing together' philosophy. By investing together with our clients, you manage a fund differently," says manager Eun Ah Schittekat.
Another form of commitment can also result from the cost structure. Some funds charge performance fees, which may only be charged if the fund achieves a predetermined performance. These performance fees align the interests of the manager and the investor: both benefit from a high return.
But be careful: be sure to check whether the overall cost level does not rise too high as a result. If the fund already charges high annual fees and adds a hefty performance fee on top of that, the bill becomes too steep. In that case, the performance fee is more of a bonus for the manager than a fair way to charge the investor.
6. Do not be blinded by star managers
The success of a fund is often attributed to a single so-called star manager. But blind trust in that person is not a good idea. History teaches that they, too, can fall from their pedestal.
After all, they face a great deal of pressure. To sustain their performance, they sometimes seek out more risk. For instance, star British fund manager Neil Woodford changed his strategy by investing more in smaller, unlisted companies. These offer the prospect of higher returns but are illiquid. When investors wanted to exit the fund following disappointing results, it turned out that Woodford could not repay them because he could not sell those illiquid investments quickly enough.
Sometimes star status leads to overconfidence. Fund managers then throw themselves into a new market, convinced that they will succeed there as well. This happened to Anthony Bolton, who, as a contrarian value investor, had built an impressive reputation with a British equity fund at Fidelity. Bolton retired in 2007, but returned in 2010 to play the Chinese growth story with a Chinese equity fund. Bolton had visited China for the first time in 2003, did not speak the language, and had no plans to learn it. His Chinese venture came to an unsuccessful end in 2015.
Overconfidence also proved fatal to Bill Miller, a successful American fund manager. His Legg Mason Capital Management Value Trust fund outperformed the S&P 500 index every year from 1990 to 2005. Miller was a value investor who dared to bet heavily on undervalued companies with strong business models. But in the years leading up to the 2007-2008 financial crisis, he wrongly gambled that housing construction and the financial sector, which were already under pressure at the time, would not decline further. It proved fatal for him. In 2008, his fund lost 55 percent.
Another danger looms when the manager's fund becomes too large, preventing him from applying his strategy in the same way. Bill Gross was the world's largest bond manager for years. His Total Return Fund consistently outperformed its rivals. But in 2011, he fell from grace due to poor performance. Gross said that his fund had fallen victim to its size. Eventually, he left Pimco and joined Janus, where he failed to achieve any further success.
Past success therefore offers no certainty whatsoever for the future. Even with award-winning funds, you have no watertight guarantee of future success. However, those who invest in a fund with a consistent investment philosophy and a strong track record do increase their chances. Although it is important not to sit back, but to monitor the fund at least annually.
If there is a good explanation for a disappointing year, you do not need to take immediate action. However, if a fund starts deviating from its investment philosophy, begins taking more risk, or starts charging higher fees without reason, then it is time to intervene. Investing in active funds therefore requires some active management from the fund investor as well. Those unwilling to make that effort would be better off choosing an ETF.
References
- Source: The Time
- Link: https://www.tijd.be/ Markets-live /fonds/algemeen/etf-of-fonds-zo-maak-u-de-juiste-keuze/10652262.html
- Authors: Peter Van Maldegem
- Photo: Filip Ysenbaert.
- Date: 13/03/2026
