ETFs Do Well – But These Mutual Funds Do Better
The hot money is flowing into ETFs but sometimes mutual funds are the better bet, despite higher costs.
The flow of new money into exchange-traded funds (ETFs) continues to outpace the growth in mutual funds by a wide margin. While it’s true that ETFs are cheaper in terms of carrying costs, many well-managed mutual funds consistently outperform their ETFs counterparts, despite higher MERs.
For example, up to May 10 the benchmark S&P 500 Index was ahead by 14.5% for 2013. The iShares S&P 500 Index Fund, an ETF that is hedged back into Canadian dollars, was ahead just over 15%. I did a search on GlobeinvestorGold to find how many funds in the U.S. Equity category did better than that over the same period, in Canadian dollar terms. I got 328 hits! Of course, many of those were different types of units of the same fund but even with those stripped out there were dozens of actively-managed mutual funds that beat the S&P and, by extension, the ETFs that track it. Here are four of them.
Fidelity U.S. Dividend Fund. This is a new entry from Fidelity, launched last November, and it looks very promising. The mandate is to invest in large-cap dividend paying stocks and the portfolio reads like a shopping list of America’s greatest companies: Proctor & Gamble, Pfizer, Exxon Mobil, Comcast, Wells Fargo, JPMorgan Chase, Chevron, etc. We have little history with which to work but the fund is off to a great start with a year-to-date gain of 15.6% to May 9 (B units). You can take a position with as little as $500.
Phillips, Hager & North U.S. Dividend Income Fund. This is yet another large-cap fund but it has a couple of advantages over the others we’ve looked at. First, it has a much better safety record than the Brandes fund. Second, the MER is lower, thus enhancing your returns. You’ll find many of the same names in the portfolio that we’ve seen already. Notable exceptions include Google, Becton Dickinson, and Berkshire Hathaway for Warren Buffett fans. The D units had gained 16.1% for the year as of May 9 and had a three-year average annual compound rate of return of 9.2% to that point. The MER is a very attractive 0.96%.
Sentry U.S. Growth and Income Fund (Class). This is another relative newcomer, launched in May 2011. It’s an all-cap fund that uses a blended approach to stock selection with a focus on securities that provide regular income with capital appreciation potential. The company ranks it as medium on the risk scale but so far it has not lost money over any 12-month period. Although manager Aubrey Hearn can invest in any size company, his top 25 is dominated by blue chips including names like Visa, Cisco, General Electric, Norfolk Southern, and Oracle. Performance out of the gate has been very strong with a 2013 gain of 17.8%. This fund pays monthly distributions of $0.0292 per unit so it is a good choice for investors who want steady cash flow. The MER is 2.82% for the fund units.
The point to keep in mind is a fund’s MER doesn’t tell the whole story. These are just a few of the many mutual funds that have outperformed the S&P 500 in 2013, even though their costs are much higher than those of ETFs. Good management can make up the difference.