Unmanaged ETFs/Mutual Funds May Not Be Your Best Choice Now

Bear market or not, we often hear the mantra: Active managers can’t beat index funds. This has proven to be true most of the time, but there are exceptions. If you can recognize when these exceptions may apply, you may be able to outperform even some of the best index funds. In this article, I will deal solely with investing in Vanguard index ETFs and unmanaged mutual funds and comparable managed ETFs and funds.

There’s no denying that two of Vanguard’s most popular ETFs, Total Stock Market Index ETF (VTI) and Vanguard S&P 500 ETF (VOO) and the two mutual funds in the same class, Vanguard Total Stock Mkt Index Admiral (VTSAX) and VFIAX, have had a terrific run in the last decade or even longer. And active managers have typically underperformed these unmanaged funds over the same periods.

But what if we consider just the last 12 months, since the start of Sept. 2021, a period which includes when inflation, an overheating job market, and other problems for stocks started to become visible, will there still be an outperformance of unmanaged funds over managed ones?

While granted that unmanaged ETFs and index mutual funds seem to have cornered the market due to their low fees and tax advantages as compared to managed funds, this may be a time it may be more advisable to gravitate toward managed funds to get superior performance. And right now, may be just one of those times.

To see, I selected all Vanguard actively managed funds, both ETFs and mutual funds, and pitted their performance against their matched ETFs by category over the last 12 months. (Data through Sept. 30.) For example, the Vanguard PRIMECAP Fund (VPMCX), a managed large cap growth mutual fund, was pitted against the Vanguard Growth ETF (VUG).

How the Comparisons Turned Out

Managed ETFs

There are only six actively managed ETFs, all mid cap funds. The following table shows how these relatively unnoticed, managed ETFs have done over the above period as compared to their unmanaged, same category brethren. The last column, labeled “Winner?”, answers whether the listed managed ETF outperformed its comparable unmanaged ETF. A “Yes” answer means the managed fund shown in the left column did better than unmanaged fund, listed at the bottom of the table.

Managed ETF Name (Symbol)	Category	Performance Since 10/21	Winner?
U.S. Liquidity Factor (VFLQ)	Mid Blend	-19.49%	Tie
U.S. Minimum Volatility (VFMV)	Mid Blend	-7.03	Yes
U.S. Momentum Factor (VFMO)	Mid Growth	-16.42	Yes
U.S. Multifactor (VFMF)	Mid Value	-9.94	Yes
U.S. Quality Factor (VFQY)	Mid Blend	-17.41	Yes
U.S. Value Factor (VFVA)	Mid Value	-10.29	Yes

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Note: These are the comparable ETF performances:

• Mid Cap (VO) -19.49
• Mid-Cap Growth (VOT) -27.35
• Mid-Cap Value (VOE) -10.97

As you can see, every one of the managed funds of the same category beat investing in an unmanaged Vanguard’s ETF, except for one in which the performance scores were equal. While all of the performance results were negative, one would have experienced less loss in the five other managed EFTs than the unmanaged ETFs one could have chosen. This may give a powerful reason for checking out these relatively new actively managed ETFs.

Managed Mutual Funds

There are considerably more actively managed mutual funds than actively managed ETFs, and more if we were to include International, Admiral shares, Balanced and funds with high minimums. We will not consider any of the latter.

As before, a “Yes” answer means the managed fund did better than the unmanaged one.

Managed Mutual Fund Name (Symbol)	Category	Performance Since 10/21	Winner?
Capital Opportunity (VHCOX)	Mid Cap Gr.	-20.45%	Yes
Diversified Equity (VDEQX)	Large Blend	-22.61	No
Dividend Growth (VDIGX)	Mid Blend Gr.	-6.18	Yes
Energy (VGENX)	Energy	14.44	No
Equity-Income (VEIPX)	Large Value	-4.67	Yes
Explorer (VEXPX)	Small Cap Gr.	-25.47	Yes
Explorer Value (VEVFX)	Small Cap Value	-18.09	No
Growth and Income (VQNPX)	Large Blend	-13.94	Yes
Health Care (VGHCX)	Health	-7.23	Yes
Mid-Cap Growth (VMGRX)	Mid Cap Gr.	-32.82	No
PRIMECAP Core (VPCCX)	Large Blend	-15.92	Yes
PRIMECAP (VPMCX)	Large Growth	-17.25	Yes
Selected Value (VASVX)	Mid Cap Value	-13.81	No
Strategic Equity (VSEQX)	Mid Cap Blend	-14.81	Yes
Strategic Small-Cap Equity (VSTCX)	Small Cap Blend	-16.24	Yes
U.S. Growth (VWUSX)	Small Cap Gr.	-37.81	No
Windsor (VWNDX)	Large Value	-7.84	No
Windsor II (VWNFX)	Large Value	-15.02	No

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Note: These are the comparable ETF performances, as of Sept 30th:

• Total Stock Market (VTI) -17.96
• Energy (VDE) 43.36
• Value (VTV) -6.50
• Small Cap Growth (VBK) -30.04
• Small-Cap Value (VBR) -13.55
• Health Care (VHT) -8.32
• Mid-Cap Growth (VOT) -27.35
• Growth (VUG) -25.83
• Small Cap (VB) -20.69
• Mid-Cap Value (VOE) -10.97

If you compare the performances of these 18 managed funds with each of that of the same category ETFs that one could have invested in instead, we find that 10 of the 18 managed mutual funds outperformed the ETFs. All of the results were again negative except for both Energy funds. While this is close to an even split, it is in the same direction as shown above for the ETF-to-ETF comparisons shown above.

Right Now Unmanaged Funds May Have an Edge

Obviously, there are very few articles that I have previously published here, of my 100 Seeking Alpha articles (including this one), and on my own website, that are guaranteed to give you winning approaches. But one should still consider new ideas, especially those that may go against the way most investors are now thinking that unmanaged ETFs and mutual funds are always better than the “older style” managed funds.

Of course, for long-term hold investors, the above data may not lead you to change any of your investments. That may make sense, given the long-term outperformance of unmanaged funds. But most readers of Seeking Alpha are looking for new ideas to make improved returns, even if those improved returns mean less stagnant returns than otherwise in a down, or even flat, market. Perhaps this article will give some investors possible different choices for doing that.