Flipping a coin

2022 was a year to forget. Not only because of the ~20% drop in stock markets but also because of the double-digit correction in the fixed-income market. But this is only the return of the benchmark indices. Although over the past 20 years we've seen exponential growth in “passive investing,” specifically in the ETF industry (funds that trade on the exchange, track benchmark indices and have very low costs), “active” mutual funds remain a widely used alternative, especially among Latin American investors.

In S&P's latest report analyzing the performance of mutual funds against their benchmarks, we see that, in the U.S., only 49% of them managed to beat the S&P 500 in 2022. If we extend the review to 3, 5 and 20 years, the winners shrink to 26%, 13.5% and 5.3% respectively.

Some say mutual funds should be used for other, less deep markets, but the numbers reflect the opposite. In Europe, more than 91% were below the index, while in Brazil and Chile 76% and 80%, all over 5 years.

Passive investing is here to stay, and last year was another sign that if we bet on funds, our odds are no better than flipping a coin.

This column was originally published in La Segunda [LINK]