How does the alpha generated by ETFs compared to that of actively managed mutual funds? The question is addressed in a recent WealthManagement article.
The article cites Morningstar data that shows only 54 active ETFs (20 percent of total) generated positive alpha over the past 3 years. WealthManagement screened more than 25,000 portfolios to find ETF-like characteristics (i.e. open to investors with low minimum investment threshold), and its analysis showed that the top performers were technology products. “As a class,” the article says, “tech portfolios—even passively managed funds—have outperformed the broad market for some time.” It also showed that the weighted average alpha for the ETFs is 14.97 compared to 17.73 earned by mutual funds.
Regarding cost efficiency, the study determined that the weighted average expense ratio for the ETFs was 70 basis points versus 127 bps for the mutual funds. “The numbers speak for themselves,” the article says, adding, “ETF investors have committed the bulk of their assets to the most efficient portfolios while mutual fund investors have sunk their money in less able products.”