You gotta love the exceptions.

So, the general rule is that ETFs cost less than active funds, and this savings translates into a performance advantage for ETFs over comparable active funds because less is skimmed away from the returns, right?

Well, it seems like once again, Vanguard is turning conventional wisdom on its head, according to Lewis Braham at Barron's.

Braham's writes that many -- admittedly not all, but still many -- Vanguard active funds are cheaper than their ETF competitors that provide comparable coverage, and also perform better than their benchmarks over the long term.

He raises the obvious question: so why bother with ETFs?

Apparently, ETFs do provide advantages in terms of consistency, he writes. Which makes sense, given that ETFs follow -- more or less -- their indexes while active funds have, well, active managers.

Also, not all of Vanguard's funds are all-stars, according to Braham. Some funds have huge PM teams, demonstrating the "too many cooks in the kitchen" effect.

There can also be trading costs.

Finally, Braham writes, there is the tendency of investors to buy active funds when they are at their peaks, only to later suffer from corrections, volatility, etc. This one is hardly the fault of Vanguard, or of any active managers though, scratch this one down to the wonders of behavioral finance. Those with self control do well over ten-year periods.

Read more in Barron's. 

Edited by: Tommy Fernandez


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