IndexFunds.com Staff

Comparing Mutual Funds to Different Benchmarks

What a difference two years can make. In 1999, only 33% of mutual funds were able to beat Standard & Poor's (S&P) 500. In the year 2000, over 72% of all mutual funds managed that task. Nearly half of all funds managed to outgain the S&P 600 Small Cap index in 1999. In 2000, a mere 16% managed the task.

Here are some returns from 2000 for different asset class indexes, together with the percentage of mutual funds that had higher returns than that index in 2000.

                         Wiesenberger Data through 12/31/2000

For a complete list comparing returns and percentage of winning funds for 1999 and 2000 across more indexes, click here to receive a copy of The Index Insider, IndexFunds.com's subscription-based newsletter. The December issue is available for downloading, and this month's issue (which includes the data) and February's are free with an annual subscription.

The study also used S&P 500 funds to illustrate the direct impact that higher fees have on total returns. While it may seem shocking that someone would pay 100 or even 150 basis points (1%-1.5%) in expense ratios annually for a plain vanilla S&P 500 fund, the effect of this fee on returns is not. A table in the same above study graphically illustrates the direct effect that higher expense ratios have on returns of 40 of the most prominent S&P 500 funds.

Because the component stocks should theoretically be the same in all of the S&P 500 funds, it is an easy point to make. Investors should be very aware of the fact any mutual fund must overcome its expense ratio to achieve market returns.

It has been pointed out in the much of financial media that 2000 was a blowout year for active management. Afterall, as mentioned, 72% of all funds (and 74% of active funds) had higher returns than the S&P 500 in 2000. Overall, however, active funds tend toward smaller stocks than those held by the S&P 500. Small stocks did better than large cap stocks in 2000. Therefore, of course, the average performance of active funds appears better than that of the S&P 500. Compared to the S&P 600 index of small cap stocks, only 17% of the fund universe managed higher returns. On the active/passive question, of course the real numbers lie somewhere in between.

Perhaps a better comparison than the S&P 500 or S&P 600 might be an index that represents the total market, like the Wilshire 5000 or Russell 3000. And as you can see, comparisons to the total market have not been kind to the broad field of funds over lengthy recent time periods.

In an effort to do an even better job comparing apples to apples, IndexFunds.com will release a number of studies in coming days to determine whether, and to what extent total returns bear this out in different investment categories. Few argue that active funds outperform index funds for large U.S. stocks. It is often stated that investors are better served with active funds when investing in small or international stocks, however. Our aim will be to see whether investors are better served with active or passive funds in these market sectors.

A complete analysis of index and fund returns for 2000 is available in the Index Insider. Click here to receive a sample copy and learn how you can subscribe.

The January issue of The Index Insider contains:

· Q&A with Dow Jones Indexes
· How New SEC Rules Affect Individual Investors
· Discussion on how Morningstar calculates Price/Earnings Ratios
· Study: Comparing Returns of Mutual Funds to Benchmarks in 2000
· Appendix I: Historical returns of over 250 Major Indexes Worldwide
· Appendix II: Complete Breakdown of ETF Returns and Data