Change Your Style By Driving An ETF [iShares Core S&P Mid Cap ETF, iShares S&P SmallCap 600 Index (ETF)]

February 13, 2015 4:59pm NYSE:IJH NYSE:IJR

etfsHave you ever tried to take advantage of that great rental car deal for an exciting sports coupe? You typically find that the “great deal” vanishes quickly after things like fuel surcharges, airport “convenience” fees, mileage and taxes take their toll. 


You also find that rally stripes on the hood and fancy wheels only soften the disappointment of a mediocre engine that likely matches your own family wagon. You would have been better off taking the trusty sedan to get to your vacation spots.

Fund investing can be much the same way. Hidden costs can potentially make a big impact on your final return, particularly over the long-term. These costs don’t just come in the form of management fees, but in other critical areas such as index-tracking underperformance and tax inefficiency.

Over time, ignoring these costs can mean leaving a lot of money on the table. Instead of overpaying for underperformance, as some investors may have experienced in the last few years, investors should look for a cost efficient manner to seek their returns. And some exchange traded funds (ETFs) have proved to perform better than the average active mutual fund.

Time to change your style?

Many investors are familiar with the “style box” investment model, which traditionally groups a diversified blend of actively managed mutual funds to help investors reach their goals.

But in today’s changing marketplace, portfolio construction is moving beyond active-only models, as investors increasingly look to low-cost ETFs that track broad indexes. Today, we believe investors can get more value by combining ETFs for their long-term holdings with well-managed mutual funds for the markets, sectors and objectives you and your financial advisors have strong convictions in.

ETFs for core performance

These days, ETFs are not just about low cost and transparency. They can also outperform comparable mutual funds. In fact, on average, iShares S&P style box funds outperformed 90% of their active peers over the past five years.1 And they’ve done this at roughly one-third the cost of typical mutual funds2 and are tax efficient.

These ETFs are designed and managed by BlackRock to fit well within the style box. For example, the iShares Core S&P 500 (NYSEARCA:IVV) contains the top large-cap U.S. stocks. Similarly, iShares Core S&P Mid-Cap (NYSEARCA:IJH) and iShares Core S&P Small-Cap (NYSEARCA:IJR) funds track mid- and small-cap American companies.

Get the active you pay for

You should think of your active investments in similar terms: Am I getting what I’m paying for? In other words, seek from your active funds what index funds can’t offer, such as specific market outperformance or goals-based objectives like income. Regularly examine these investments to be sure they provide value for their cost.

Index-based funds have grown in popularity―with more than $330 billion in new ETF investments last year3―as investors recognize the benefits of a vehicle that costs less and is more transparent than active mutual funds. Now, it’s becoming evident that iShares style box ETFs may also outperform many of these funds to help you to reach your ultimate financial destination.

1Source: Morningstar, as of 12/31/2014. Post-tax comparison made between the returns at NAV of iShares S&P domestic equity style box funds and all share classes of all active Open-End Mutual Funds within the Morningstar US style box category available in the US at the beginning of the investment period that survived through the end of the investment period. Returns are calculated after taxes on distributions, including capital gains and dividends, assuming the highest federal tax rate for each type of distribution in effect at the time of the distribution. Overall figure is a weighted average of the percentage of funds that the iShares ETF outperformed in each style box, weighted based on assets in each style box. Performance may be different for other time periods. US style box mutual funds are those active funds categorized by Morningstar as US Large Cap Growth / Blend / Value, US Mid Cap Growth / Blend / Value or US Small Cap Growth / Blend / Value. Past performance does not guarantee future results.

2Source: Morningstar, as of 12/31/14. Comparison is between the Prospectus Net Expense Ratio for the average iShares ETF (0.38%) and the average Open-End Mutual Fund (1.27%) available in the US.

3 Source: Bloomberg as of 12/31/2014.

This is a guest post from Matt Raynor, iShares Retail Strategist. You can learn more about iShares Performance ETFs here.


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