Here's the reality of mutual funds and ETFs that beat the stock market in 2023

By Mark Hulbert

A good year does not make a trend

Don't let last year's improvement in the percentage of mutual fund managers who beat the stock market fool you. This long-term capacity remains weaker than ever.

A reminder of these grim odds is the recent release of investment researcher Morningstar's latest U.S. asset/liability barometer, updated to reflect performance in 2023. Last year, 47% of equity mutual funds variable and actively managed exchange-traded funds beat their benchmarks – a marked increase from the minimum rate of return of 43% in 2022. Morningstar calls the increase a “surge.”

Yet active managers have not become better at beating the market over the long term, as Morningstar acknowledges. Although the percentage of funds that beat the market varies significantly from year to year, the proportion of funds that beat the market over 10- or 20-year periods remains small.

To show that there is no long-term trend, I turned to my auditing firm's database of several hundred investment newsletter histories. For each calendar year since 1981, I have calculated the percentage of monitored newsletters that beat the Wilshire 5,000 Total Market Index XX:W5000FLT. There is no statistically significant trend in these annual percentages, which have fluctuated between 80% and 5%.

No matter how large that proportion was in any given year, the percentage of that year's cohort beating the market eventually fell below 20% (or even below) as the period on which their returns were calculated was long. To illustrate this, consider the newsletters my firm followed in 1982. More than 70% of that cohort beat the Wilshire 5,000 that year, far higher than the 47% success rate in 2023 among mutual funds in investment and ETFs.

Yet in the five years from 1982 to 1986, only 24 percent of the 1982 newsletter cohort beat the market. By the time the performance window extended to 15 years – from January 1982 to December 1996 – the percentage of that 1982 cohort beating the market had fallen to 14%.

Even this already low percentage gives too rosy a picture. Indeed, many of the bulletins published in 1982 did not survive until 1996. Twenty-nine percent of the 1982 group did not survive the full 15 years, and virtually all were late to the market at the time. where they stopped publishing. . Accounting for this survivorship bias, less than 10% of the 1982 newsletter cohort beat the market in the 15 years through 1996.

This 1982 newsletter cohort is not unique. I chose it because it illustrates the inexorable deterioration of the market's outperformance percentage as we focus on a longer and longer period of performance.

It's no surprise that a similar trend exists among mutual funds and ETFs. Morningstar calculated how many funds and ETFs in 2023 were able to beat their benchmarks over increasingly longer periods; these results are summarized in the table above. Over a 20-year performance horizon, the success rate is as low as 5%.

The implication of investing, as is often the case, is to invest the majority of your portfolio in index funds. Investing in an actively managed mutual fund or ETF represents a triumph of hope over experience.

Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at [email protected]

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Also read: Zero. That's the amount 28% of the country has saved for retirement.

-Marc Hulbert

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03/23/24 0814ET

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