The investment giant's study examined monthly cash-flow data from Morningstar for the 10-year period ended Dec. 31, 2011. The data included stock and bond funds, both conventional open-end funds and ETFs (but not funds of funds, balanced funds, or target retirement funds), and categorized them by cost.
Vanguard classified the funds into five categories:
- All equity funds (both conventional mutual funds and ETFs)
- Actively managed equity funds
- Stock index funds
- Stock ETFs
- All bond funds (both conventional funds and ETFs)
Within each of the five categories, it grouped funds into quartiles based on their annual expense ratios and calculated the net cash flows for each quartile. It then further analyzed the net cash flows into the lowest-cost funds by breaking down that lowest-cost quartile into additional quartiles, again based on expense ratios.
The good news is that for stock funds, the lowest expense quartile attracted $360 billion, or 100 percent of the positive cash flows into stock funds, for the 10-year period. The other three quartiles lost almost $300 billion, with the highest-cost quartile losing $134 billion. Even better is that within the lowest-cost quartile, the lowest quartile (the cheapest 6.25 percent by expenses) gained $473 billion. while the highest-cost quartile lost $79 billion. The three higher-cost quartiles suffered total cash outflows of more than $293 billion over the same period. Not surprisingly, almost 80 percent of the funds in quartile of quartile 1 were index funds or ETFs, and these funds captured nearly 90 percent of the $473 billion in cash flows.
More good news: Actively managed funds experienced over $350 billion in net outflows, with negative flows in all quartiles, even the lowest-cost one. Only the active funds in the lowest quartile of the lowest quartile had net inflows.
The pattern was the same for stock index funds, with the lowest of the lowest-cost funds gaining the vast majority of net inflows. And the pattern was similar, though not quite as strong, for both stock ETFs and bond funds of all kinds.
Investors appear to be wising up to the notion that indexing gets you market returns, lower costs, and relatively high tax-efficiency. By contrast, active investing delivers the same market returns, but with high costs and relatively low tax efficiency.should be very proud of the revolution he started 35 years ago, one he still leads today.
Image courtesy of taxbrackets.org