2014 Conference

Due to a trending view that the lower internal costs of "passive investments" will dominate actively managed mutual fund returns after accounting for their higher fees, there has been a significant shift of retail investments managed through financial advisors into exchange-traded funds (ETF’s- investments that track a specific stock or bond index and trade intraday on the New York Stock Exchange). This shift has often entailed a replacement of mutual funds with ETF's in a traditional style-box asset allocation model with the objective of achieving more desirable risk-return characteristics. Using various long-term, strategic risk profiles in an industry standard Morningstar Style Box representation matrix for equities, we overlaid specific investor recommendations onto their corresponding investment-style categories (Value, Blend, Growth) and company-size (Large, Medium, Small). We then back-tested and compared ETF and mutual fund portfolios over a 10-year period from May 5, 2001 through October 31, 2011, after controlling for typical advisor annual fees of 1%. The results showed that under volatile market conditions, mutual fund portfolios had higher returns across all allocations except for the most conservative risk profile and that the beta (a measure of volatility) of every mutual fund portfolio tested was lower than its corresponding ETF portfolio.