Why do people continue to invest in mutual funds (instead of ETF) despite continued underperformance against their benchmark?

I only invest in individual stocks and selected ETFs but I always wonder how is it mutual funds still continue to accumuate that much AUM. A quick glance at their performance would tell me that over 3Y, 5Y period, they almost always underperform their benchmark. Especially so for equity funds benchmarking themselves to the S&P 500.

So why are people still willing to pay high mgmt fees for mutual funds when they could get a low cost ETF for that same exposure? It doesnt seem like a rational behaviour and plus banks and FAs are still promoting these products!

Discussion (31)

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CTKS

12 Aug 2021

I believe many continue to think that they are able to select fund managers who can beat the averages.

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Andy Chan

Edited 11 Aug 2021

There is some misconception between the two.

According to Investopedia, a mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities. Based on this definition, you can have both passive index mutual funds (or index funds) and active mutual funds. The "Vanguard® U.S. 500 Stock Index Fund" is a mutual fund that tracks the S&P500.

While ETFs are slightly different, you can sort of view them like a mutual fund (although this might be an oversimplification), with the exception that you can buy and sell them. Similarly, you have both actively managed ETFs (like ARKK) and passive ETFs like VOO.

Endowus has published an article that addresses some of the misconceptions regarding unit trusts and ETFs here: https://endowus.com/insights/unit-trust-etfs-di...

My point is that not all unit trusts are bad, and not all ETFs are good.

https://www.investopedia.com/terms/m/mutualfund...

https://www.investopedia.com/terms/e/etf.asp

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Robin

10 Aug 2021

Administrator at SG

I think whether to be more focused in your investment or to be very diversified (UTs) is up to individual. Not everyone can stomach the volatility and hence some prefer to be super diversified. So it cuts both ways, low volatility but lower returns too.

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Tan Siak Lim

10 Aug 2021

CFP. Director, Financial Advisory Group at Financial Alliance

Most people will still lose money investing in ETF due to bad market timing. Human emotion will cause us to chase market going up and sell when the market crash, sure way to lose money.

While the majority of mutual funds (majority means 50%) have poorer performance to ETF, there are still actively managed funds that outperform. Even if there is only 20% (I believe there are more), that's still more than 200 funds.

ETF means buying anyhow, regardless of whether it's a good company, and even when the price is already too high, just because the stock is in the index. People who take pride with fundamental analysis simply cannot bring themselves to do that.

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