Larry Kudlow spent part of his Fox Business show earlier this week walking through Wall Street Journal research on active versus passive fund performance with contributor Liz Peek, and the picture is unflattering for stock pickers. Only 27% of actively managed U.S. large-cap equity funds beat their benchmark over the last 12 months, and over the decade through June, just 13% of active managers beat their benchmark. The money has followed the performance, with passive investing near $15 trillion in assets and low-cost passive ETFs on pace to hit $1 trillion in net inflows for the first time this year.
Indexing has beaten stock picking again, as it has for most of the modern era. What deserves attention is how the industry has translated that victory into a marketing pitch for products sharing almost nothing with the strategy that actually won.
Peek said on the same segment that “there is an ETF for everybody. Whatever your preference, there is an ETF for you so they have made it almost irresistible actually.” That line is meant as praise. Read carefully; it is also the warning inside the good news.
What The 13% Number Actually Proves
The 13% figure is a real result, although not a clean one. Fund databases suffer from survivorship bias because failed funds are merged out, so the surviving cohort is already stronger. The true share of managers who beat over a full decade is likely lower than reported.
The figure says a small minority of managers beat the market over a decade, and it says nothing about identifying those managers before the decade begins. That prospective identification problem is the real one, and no fee-based industry has ever solved it reliably.
The passive comparison sharpens the point. Over the ten years through this week, SPDR S&P 500 ETF Trust (NYSEARCA:SPY) returned 251.91% at an expense ratio of 0.0945%. A holder who did nothing paid essentially nothing to outrun the vast majority of professionals.
Vanguard’s competing product, Vanguard S&P 500 ETF (NYSEARCA:VOO), charges a headline expense ratio of 0.03% per year. That is the cost of the winning strategy.
Why The Wrapper Matters Less Than The Strategy
Peek argued on air that “ETFs are cheaper. They are more tax efficient. They are more easy to manage. You can get in and out any number of times during the day not just at the end of the day.” All true, and all beside the point when the wrapper contains something other than a broad index.
The same legal structure that houses a three-basis-point S&P 500 fund also houses daily leveraged single-stock products, thematic baskets, covered call overlays, and active strategies rebranded as ETFs. A prospectus for one leveraged Direxion product warns that the fund uses options, swap agreements, and other instruments to obtain economic leverage, turning small market movements into larger changes in the value of the investments. That is a different product category entirely.
Intraday tradability is a feature only when the strategy calls for it. For a decade-horizon indexer, the ability to sell every 15 seconds is a temptation, and the wrapper’s tax efficiency does not hold if the holder acts on it.
The industry knows this. New launches skew toward thematic and leveraged products because those carry higher fees, and the argument that ETFs won gets used to sell every one of them.
What Won, In One Sentence
Low cost and broad diversification beat stock picking over long horizons. That is the finding, and it survives whether the vehicle is a mutual fund, a separate account, or an ETF, because the mechanism is fees and breadth rather than trading structure.
If you treat the Wall Street Journal data as permission to buy a leveraged semiconductor fund, you have drawn the wrong conclusion. The $15 trillion that moved into passive went into cheap, diversified index funds that most holders leave alone, not daily-reset products.
Kudlow closed with “I always say stocks for the long run. Some others, those guys wrote about this years and years ago, even before the passive funds overtook it but they were right.” The reference is to Jeremy Siegel, and the point predates the ETF boom by decades. The vehicle changed, but the advice held.
The useful takeaway from another decade of active underperformance is that expenses and time in the market are doing the work. Anything sold on top of that finding, whether it is a sector bet or a leverage product, is a separate decision requiring its own justification.
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