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Page 7 of 20
You can see in some cases―the financial case, for example―the fund’s return trail the index return by almost 11% per year over the last five years. The investors had a negative return of almost 29% over the last five years, a lag in return of almost 18% a year. It is hard to believe. And there, 100% of the funds lag the index. So when you put those two charts together and add them up, out of 79 exchange-traded funds that we covered, 68 of them had investor returns that were either substantially, significantly, or moderately at least short of the returns earned by the funds themselves.
So if you want to take some kind of a simplified average and say that fund returns were generally negative to about 1% a year, and the investor returns on average were negative about 3.5% a year—I’m sorry. The fund returns happened to be positive, thanks to energy and utilities and emerging markets and such segments as that, just a simple average of positive 1%. You find the ETF returns averaged about 6% on these charts, accumulated over five years. But investor returns, if you take -3.5% with negative compounding over five years, investor returns were about -12%.
So when you put plus 6% for the five-year total return for the fund and -12% for the five-year total return for the investor, you are talking about 18% of investor capital that has been lost by all this trading. Now, you can ask, “Don’t regular mutual funds have this same problem of investor returns lagging the returns of the indexes or returns of the funds they own?” Of course they do, but it is not nearly as bad.
To show that, we will introduce one more chart, which I think will be the last chart I will use, so we can open it to your discussion. We happen to have Vanguard mutual funds that have ETFs, exchange-traded funds, in each of these categories. And we have compared the returns on the Vanguard mutual fund returns on this chart, beginning with large-cap blended funds, large-cap growth, large-cap value, mid-cap blended, small-cap blended, emerging markets and real estate investment trusts. We have a regular fund in those areas, Vanguard does: a regular mutual fund. Those returns are shown near the center section of the chart. And the investor returns on the exchange-traded funds are shown on the right side.
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