Paul's Insights: Is it really possible to beat the market?
Following the market mayhem we saw in March, Australian shares have notched up gains of 13.75% over the last quarter[1]. And after a massive spike in sharemarket activity through March, investors are settling down to a more regular pattern of trading.
Over 67 million share trades were made during March[2], almost double the normal volume. It’s a no-brainer that this would have been driven chiefly by investors bailing out of shares. But as investors climb back in to the market, exchange traded funds (ETFs) are proving very popular.
The appeal of ETFs is that you get immediate diversity – across different shares, sectors and even geographic regions, backed by very low fees. Many ETFs are index funds. This means they aim to replicate the performance of a particular market index, like say, the ASX 200. It’s a very different approach from actively managed share funds, which typically aim to outperform the market by picking stocks that will deliver healthy gains. It is the passive approach of index funds that helps to keep their fees so low.
Some investors aren’t comfortable with simply accepting whatever returns an index or index fund dishes up. That’s fair enough. The idea of beating the market is always appealing. The problem is that it is extremely hard to do consistently.
As a guide, the SPIVA Scorecard tracks how well actively managed funds outperform the market over time. The latest SPIVA Scorecard[3] for Australia shows that over the five years to December 2019, only 19% of actively managed share funds achieved above-market returns. Eight out of ten failed to beat the market.
The winning streaks enjoyed by actively managed funds are often short-lived. Research by S&P Global[4] tracked the performance of the top 25% (by returns) of actively managed funds in 2015. Out of the top-performing funds, only 1.7% consistently beat the market over the following four years.
For investors, this shows how low the odds are of picking an actively managed fund that consistently tops market returns. In periods of extreme volatility, it is even harder to beat the market. Yet investors pay fund fees regardless of whether their fund has dished up gains or losses.
This highlights why ETFs have become so popular among Aussie investors. Sure, not all ETFs are passively managed index funds, but the common thread is very low fees. That matters because outperforming the market year after year is exceptionally difficult. Taking control of the cost of your investments is a lot easier to do.
Learn more about InvestSMART's Capped Fee Portfolios here.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
[1] https://au.spindices.com/indices/equity/sp-asx-200
[2] https://www.asx.com.au/asx/statistics/tradingVolumes.do
[3] https://au.spindices.com/spiva/#/reports
[4] Persistence of Australian Active Funds, December 2019
Frequently Asked Questions about this Article…
ETFs offer immediate diversification across different shares, sectors, and geographic regions, all with very low fees. This makes them an attractive option for everyday investors looking for a cost-effective way to invest in the market.
ETFs, especially index funds, aim to replicate the performance of a market index, like the ASX 200, and are passively managed. In contrast, actively managed funds try to outperform the market by selecting stocks expected to deliver higher returns, often resulting in higher fees.
Consistently beating the market with actively managed funds is extremely challenging. According to the SPIVA Scorecard, only 19% of actively managed share funds in Australia achieved above-market returns over a five-year period, highlighting the difficulty of consistently outperforming the market.
Low fees are crucial because they directly impact your investment returns. Since outperforming the market consistently is difficult, controlling the cost of your investments through low fees can help maximize your net returns over time.
The SPIVA Scorecard shows that a majority of actively managed funds fail to outperform the market. Over a five-year period, only 19% of these funds in Australia achieved above-market returns, indicating the challenges of selecting a consistently successful fund.
ETFs have gained popularity due to their low fees and the diversification they offer. They provide a straightforward way to invest in a broad range of assets without the high costs associated with actively managed funds.
During periods of market volatility, it becomes even harder for actively managed funds to beat the market. Investors may face increased difficulty in selecting funds that consistently deliver above-market returns, making low-cost options like ETFs more appealing.
Everyday investors can take control of their investment costs by choosing funds with low fees, such as ETFs. By minimizing fees, investors can improve their net returns, especially when consistently beating the market is a challenging feat.
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