Profitability of Sector Mutual Funds and ETFs During Market Development and Length of Investment Horizon

Martin Širůček,Jan Vystoupil,Petr Strejček

doi:10.5817/fai2018-2-3

Abstract

This paper focuses on the profitability of investments into IT, finance, healthcare and consumer goods oriented active and passive mutual funds and ETFs and their profit/loss in different market situations (growing, stagnant and decreasing markets).The aim of the paper is to set recommendations for investors as regards which instrument (active or passive mutual fund or ETFs) brings higher return or lower loss over the time and market development and if investors can expect different results based on the sector orientation, which sector is more sensitive to bullish or bearish trends. Our results show that neither ETF nor passive mutual funds were able to beat the market, as the sector index brings better results than these investments in all situations. Within bearish trend, all sector ETFs and passive mutual funds bring the same results as sector index, only active managed mutual funds bring better results. The lowest loss during this period was achieved by active managed mutual funds focusing on healthcare. Bullish and stagnant markets bring quite the same results, but passive funds and ETF are more profitable than active mutual funds in growing markets.

Highlights

Active and passive portfolio management and/or differences in the returns of the active and passive managed funds have long been a subject of discussion in the investment world but maybe first of all in the academic sphere
Conclusions of the recently performed studies have tended to suggest that the fund managers are not able to overcome the market in the long run and are lagging behind performance of the passive mutual funds and/or the benchmark copying exchange-traded funds (ETFs)
This article is an extended version of Širůček et al (2018), which was discussed at the international scientific conference European Financial System 2018

Summary

Introduction

Active and passive portfolio management and/or differences in the returns of the active and passive managed funds (incl. the exchange-traded funds, or ETFs) have long been a subject of discussion in the investment world but maybe first of all in the academic sphere. Conclusions of the recently performed studies have tended to suggest that the fund managers are not able to overcome the market in the long run and are lagging behind performance of the passive mutual funds and/or the benchmark copying ETFs. This article is an extended version of Širůček et al (2018), which was discussed at the international scientific conference European Financial System 2018. The research questions are if active or passive mutual funds or ETFs bring higher profit when the market grows or if the portfolio manager can, by an active approach, reduce the loss when the market falls; further if some branch is more sensitive to positive or negative developments. Is the reaction of portfolio managers of an active mutual fund faster when the market grows than the passive investment strategy? We further included the elements of risk and sector analysis in our research

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Conclusion