Today I’ll show you a real-life example of changes in a mutual fund’s holdings and how they compare to an ETF with the same objective.
ETFs Let the Sun Shine In
Stock mutual funds usually have “active management.” That means someone — either an individual or a committee — makes subjective decisions to buy or sell stocks for the fund and the allocation each will receive. Some active managers are better than others, of course. Over time, their talent (or lack thereof) will be evident in the results.
What isn’t always evident are the choices the manager has made. Government regulations require funds to disclose their portfolio holdings only twice a year, in annual and semi-annual reports.
|ETFs don’t mind the daylight.|
Some mutual fund sponsors reveal the information more often — but rarely more than quarterly. Even then, the data is often weeks or months old before you see it.
ETFs, on the other hand, are (with a few exceptions) designed to track an index. ETF sponsors post their holdings on the web with daily updates. Indexes can and do change their holdings — but you always know in advance when it happens. For instance, the annual reconstitution of the Russell indexes takes place tomorrow (June 22) after the market closes, but the changes have already been announced.
Small Cap Value Face-Off
Let’s evaluate a pair of funds in the domestic small-cap value segment as an example …
On the mutual fund side we will consider Eaton Vance Small Cap Value Fund (EAVSX). This is a load fund, meaning it is sold through brokers with an additional sales charge, but we will ignore that fee in our performance numbers.
EAVSX is actively managed by a team at Fox Asset Management consisting of Gregory R. Greene, J. Bradley Ohlmuller, and Robert J. Milmore. This group has been at the helm since 2006.
Our ETF contender is iShares Russell 2000 Value Index Fund (NYSEARCA:IWN). As the name indicates, IWN follows the Russell 2000 Value Index. iShares changes the ETF portfolio only when Russell adds or removes stocks from the index.
The long-term chart below shows very similar results for IWN and EAVSX. The total annual return since July of 2002 (the inception date for EAVSX) was +6.4 percent for EAVSX and +6.3 percent for IWN. (These figures include reinvestment of dividends and annual expenses on both sides, but exclude the 5.75 percent front-end load in EAVSX).
The first quarter of 2012 had a clear winner. EAVSX gained 7.4 percent, which is nice. But IWN did even better with an 11.6 percent three-month return.
Why did EAVSX lag? Probably because it owned some underperforming stocks during this quarter. What were they? More important, are the laggard stocks still there? Both are good questions.
Dig Into the Holdings Data — If You Can
According to the EAVSX annual report, its top holding at the end of 2011 was a company called Cleco (NYSE:CNL). This stock accounted for 3 percent of the fund’s assets on December 31, 2011. Another top holding was Westar Energy (NYSE:WR) with a 2.5 percent weighting.
By March 31, 2012, Cleco was down to a 1.6 percent weighting in EAVSX, placing it at #33 out of 59 holdings in the fund.
Westar? EAVSX management apparently decided to sell, because by the end of March it was no longer in the holdings list. Whether it was sold in early January, late March, or somewhere in between is unknown.
Now, why am I talking about March when we are now at the end of June? Because Eaton Vance doesn’t provide any more recent information.
We don’t know what happened to CNL or WL. It appears the fund sold half its CNL shares and all of its WL shares at some point between December 30, 2011 and March 30, 2012. The rest of CNL may be gone by now.
|“It’s down there somewhere!”|
Now, contrast this with IWN. The first thing to note is that the Russell 2000 Value Index is much more diversified than the 60 or so stocks held by EAVSX. No single stock represents anything close to 3 percent of IWN.
Second, even though the list is much longer, iShares has no problem sharing it with you. They even update the information online every day.
In fairness to EAVSX and its management team, active management is a different ball game. Wall Street traders enjoy nothing more than buying and selling stocks ahead of big portfolio managers. Fund managers are wise to keep their cards hidden.
But here’s the quandary: Does active management really bring significantly better results? Based on the long-term chart above, the answer is no. And in the first quarter of 2012, the indexed IWN soundly trounced the competing active managers.
If the ETF gives you the same or better results, what reason is there to be in a mutual fund, especially when you don’t even know what the managers are doing for you?
I think the answer is pretty clear. ETFs win!
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended inMaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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