Even in passive investing, thoughtful manager selection can improve the likelihood of positive investment outcomes, according to Morningstar.
Top-performing firms include Fidelity Investments, Vanguard Group, and Dimensional Fund Advisors, all of which “have diligently managed their fund lineups and avoided high product churn,” Morningstar said in a report released Wednesday. The fund data firm evaluated the largest providers of passive mutual funds and exchange-traded funds based on factors including fees, product turnover, and index-tracking ability, as well as performance.
The firms that earned the best risk-adjusted returns relative to peers tended to charge lower expense ratios, maintain a “disciplined” approach to product development, and invest in portfolio management infrastructure, according to the report. Morningstar said Vanguard and Fidelity “consistently charge low category-relative fees” – just 30 percent to 40 percent of what passive funds typically charge – whereas Dimensional fund fees were as high 80 to 90 percent of the typical passive fund costs.
BlackRock, State Street Corp. and Invesco, which have higher fees and higher product churn, trailed the performance of Vanguard and Fidelity, according to the report. Still, Morningstar praised BlackRock and State Street for investing heavily in their portfolio management teams and technology, saying the investments are likely to help the index fund providers deliver during “stressed” market conditions.
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While the report singled out State Street as the only firm that did not decrease its average fund fees over the last decade, the analysis only included fee data through June. This month the firm’s asset management unit, State Street Global Advisors, announced it would begin offering a new suite of “ultra-low-cost” ETFs that will charge expense ratios as low as 0.03 percent. The average fee ratio across all State Street passive funds was 0.67 percent in June, according to Morningstar.
WisdomTree Investments and Van Eck Associates Corp. were also given lower ratings by Morningstar for their fee ratios, product turnover and performance, while Charles Schwab Corp. was recognized for making improvements in its passive offerings, including “aggressively” cutting fees over the last ten years.
“Beyond selecting a fund that tracks a well-constructed index and charges a low fee, choosing a fund sponsor that aligns its interest with its fundholders’ increases the odds of a positive investor outcome,” Morningstar said in the report.