Investors’ widely-held beliefs about ETFs and index funds may be wrong, says BrettArends
An analysis of mutual fund stock trades over the past two decades has thrown into question the rationale that has sent everybody and her grandmother stampeding into low-cost index funds and exchange traded funds.
Instead, their research found substantial evidence that many skilled money managers are adept at picking stocks. “Mutual fund trades outperform their benchmarks,” they wrote. And, critically, they are good at picking the stocks that are going to beat earnings expectations ahead of time: “[L]arge active trades by mutual funds prior to the month of earnings announcements have significantly positive abnormal returns in the subsequent one-, two-, and three-month horizons,” they wrote.
One group consisted of the trades that managers made simply because they had to, as a result of investors’ money flows into or out of their fund. So, for example, in a hot market the public typically invests more in stock market mutual funds, and the money managers then have to invest that money — with the result that they have to keep buying shares at higher and higher prices, regardless of what they really think is wise.
In other words, the average investor in U.S. stock mutual funds last year did twice as badly as the stock market...and all because they bought and sold at the wrong times.
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