Monday, April 21, 2014

A Look At Sloppy Nonsensical Mutual Fund / ETF Analysis

I read a lot of stuff online so I should be used to sloppy-stupid nonsensical things written online. However, this one titled "Why ETFs Are Better than Mutual Funds, in Two Charts" hits it on every base of stupidity. Now usually ETF Database is a decent source of some good information but clearly the editors were asleep at the wheel on this one. Let the article speak for itself.

It starts off fine enough
"Though some may disagree, exchange-traded funds have certainly proved their worth over the years. With more than 1,500 products to choose from, more and more investors have turned to the ETF wrapper, embracing the vehicles’ low-costs, efficiency, and many other advantages."
All is good there. And so she continues
"Some investors and industry professionals, however, have not yet come to embrace these products, preferring mutual funds instead. For those who need some convincing, we’ll try to show you why ETFs are better than mutual funds, in two charts."
Great, let's see it.
"For this exercise, we take a look at the popular Emerging Markets ETF (VWO, A), comparing it to the GS Emerging Markets Equity Fund (GEMCX). First, a comparison of expenses:"

Whoa Whoa, wait a second, WHAT? First of all what made her decide to use Goldman Sachs Emerging Markets Fund? Furthermore, why would she use a C share? The fund also comes in other share classes including IR share class which comes in at 1.48% (we will also overlook the small fact that net expense ratios for those funds are 0.15% and 2.47% not what she has listed). The only people who might be using a C share are people working with an adviser and the advisers fee is being included into the expense ratio (but that is a discussion for another day). This is nowhere NEAR an apples to apples comparison showing why ETFs are better than Mutual Funds.

She goes on to point out the performance gap that this inevitably leads to 

And she concludes:
The Bottom Line
This is just one of many examples of how ETFs are often better than mutual funds. Not only are exchange-traded funds usually cheaper, but they are often more efficient than mutual funds. If we’ve managed to convince you, use our free Mutual Fund to ETF Converter Tool to find an alternative to your current mutual fund.
Sorry, you have not managed to convince me and hopefully you didn't convince anybody with your ridiculous comparison. I hope your "converter tool" has a little more logic then is displayed here. So what is a PROPER comparison of the ETF VWO if you are trying to see the difference between mutual fund and ETF structures? Well the very simple and logical comparison would be Vanguard's Emerging Markets ETF (VWO) to Vanguard's Emerging Market Index Mutual Fund (VEMAX).

Only problem is that when you show a REAL comparison, your point is pretty much lost . As you can see, looking at the complete common period between the two funds, there return is essentially identical.

Not only does a proper comparison make her performance point invalid, her point about cost is as well, as both carry an expense ratio of 0.15%. But just for giggles lets throw in Vanguard's Active version of emerging markets which is a little more expensive with an expense ratio of 0.94%. Unfortunately, their active emerging markets strategy hasn't been around as long (A little shy of 3 years) but as you can see it has managed to handily outperform. You may also notice that over this timeframe the index MUTUAL FUND slightly outperformed the supposedly superior ETF.


  1. Thanks for the feedback, and for the kind words about the site (I'm a founder).

    This article touched a few nerves, which is kinda what we hoped for!

    You're absolutely right that we picked a pretty extreme example here. Not all mutual funds charge 2.6% and not all of them lag behind their benchmark by an enormous margin (some are pretty darn cheap and perform pretty darn well). We highlighted an egregious example to highlight larger trends: 1) many mutual funds are really expensive and 2) many mutual funds fail to beat their benchmark, due in large part to fees.

    Bottom line: whoever is invested in this mutual fund would have been way better off in VWO for the past 10 years.

    Love your site. Thanks for the feedback.

  2. Yes, I'm sure as a site owner you might just care about the "attention" but in the spirit of keeping a loyal audience I would think focusing on intellectually honest reporting would be important. This has nothing to do with why ETF's are better than mutual funds and everything to do with fees and compensation structures. I do like your site but I hope not to see this garbage show up.

  3. Yes, attention is good but I can promise you the trust of audience is much more valuable to me. Always good to get a fresh perspective from someone smart, so I appreciate the detail you put into this.

    I do disagree a bit with your conclusion...I think ETFs are better than mutual funds because of the major drawbacks of mutual funds: ridiculous fees and often poor performance. But I see and acknowledge your points as well.

    Anyways, I'm guessing we both have better things to be doing. Glad I discovered your site and Twitter feed - you're now on my reading list :-)

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