Comparing Equity Mutual Funds’ Performance in US and Europe

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Exchange Traded Funds (ETFs) are becoming more popular with investors than mutual funds in recent years. In order to meet the increasing demand ETF providers have sliced and diced the market in as many ways as possible and continue to add new ETFs to their offerings.

From a recent article in  The Journal Report of WSJ:

The first ETF in the U.S. now called the SPDR S&P 500 was launched about 20 years ago. Since then the ETF industry has grown by leaps and bounds primarily competing against the mutual fund industry. Some of the interesting tidbits from the journal article include:

  • Total number of ETFs = 1,436 (more than 10 times the total 10 years ago)
  • Total assets in ETFs = $1.3 Trillion (more than 15 times the total 10 years ago)

The Top Sponsors – The Biggest ETF companies by ETF Assets and Market Share:

  • Blackrock- $536.5 billion/40.7%
  • State Stree – $328.5 billion/24.9%
  • Vanguard Group – $235.7 billion/17.9%

The Big five – The Largest ETFs by Assets:

  • SPDR S&P 500 (SPY) = $119.1 billion
  • SPDR Gold Shares (GLD) = $74.7 billion
  • Vanguard MSCI Emerging Markets  (VWO) = $58.1 billion
  • iShares MSCI Emerging Markts (EEM) = $38.1 billion
  • iShares MSCI EAFE (EFA) = $37.9 billion

There are many reasons for investors’ preference for ETFs over mutual funds. One of the reasons if the low cost of ETFs compared to mutual funds. Currently ETF providers are engaged in a price war where some of the providers have waived the fees entirely and others are reducing them saving investors money. Another reason for the popularity of ETFs can be attributed to the average performance of equity mutual funds. The following chart shows the performance comparison of US and European equity mutual funds:

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Source: THE REAL FINANCIAL CRISIS: WHY FINANCIAL INTERMEDIATION IS FAILING, Oliver Wyman

From the Oliver Wyman report:

As has been well documented, most funds perform in-line with benchmarks. After fees, the average mutual fund equity investor will have seen a return of more like 1.5% in the US and 5% in Europe over 10 years (see figure overleaf). Yet these products may have been sold with return illustrations of up to 10%.

Disclosure: No Positions

Number of UK Publicly Listed Companies Continue to Decline

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The total number of British companies traded publicly on the equity markets continue to decline for many years due to many reasons. Unlike in the past, many companies do not find a compelling need to go public. In addition, companies are able to fund their capital requirements through internal funding and issuing debt. The explosive growth of the private equity industry is also averse impacting the number of listings. Rise in M&A activity also leads to fewer publicly listed firms.

The U.S. market also fewer listings today due to the reasons mentioned above.Most of the high tech companies going public accumulate most of their funding before they list their shares on the market. In fact, the prospectus of Facebook IPO stated “we do not currently have any specific uses for the net proceeds planned”.

The total number of publicly traded companies on the London Stock Exchange’s all markets at the end of September, 2012 is 2,500 compared to 2,938 in 2011. Currently less than 1,000 companies trade on the Main market.

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Source: THE KAY REVIEW OF UK EQUITY MARKETS AND LONG-TERM DECISION MAKING, Final Report, June 2012, The Department for Business, Innovation and Skills, UK

Hence it can be argued that a public listing is no longer considered a prestigious event or a natural progression of business growth for most companies. While there has a been a flood of IPOs on the market, it should be noted that most of these are worthless companies hyped up by Wall Street to earn investment fees and greedy Silicon Valley venture capital firms waiting to unload shares on the unsuspecting public and move to the next big fad. The disastrous stock performance of recent IPOs such as Facebook(FB), Zynga Inc (ZNGA), Pandora Media (P)‎, Groupon Inc (GRPN)‎ and Angie’s List Inc. (ANGI) are some examples.

Related ETF:

iShares MSCI United Kingdom Index (EWU)

Disclosure: No Positions

Corporate Profits and Share Buybacks Are Up But Dividend Payout Ratio Remains Low

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U.S. Corporate Profits reached all-time highs recently this year despite all the ills plaguing the economy such as high unemployment rate, debts issues, political uncertainty, etc.

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via Decisions Based on Evidence from St.Louis Federal Reserve

What are companies doing with the profits?

The current yield on the S&P 500 is 2.01%. Instead of increasing dividend payouts or investing in capital equipment, hiring companies are spending the earnings on share buybacks. Investment advisor and blogger Joshua Brown wrote an interesting post on this topic. From the post:

In the second quarter of this year, share buybacks among S&P 500 companies grew to $112 billion as corporations finished with a record $1.03 trillion in cash sloshing around on their balance sheets. This buyback amount represented a 30% jump over Q1. In contrast, S&P 500 corporations paid out just $70 billion in cash dividends during the same period, an 11% growth rate over the prior quarter.

This preference for financial engineering over hiring, expansion, M&A, or dividend issuance has been in force for a while now.

And quite frankly, nothing could be less productive.

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Source:  The Buyback Epidemic, The Reformed Broker

U.S. companies are able to generate higher profits due to globalization, automation, higher productivity from workers, raising prices, outsourcing, continuous decline in wages and benefits for most workers and many other factors. The following chart shows the downward-trend of wages:

Source:  What’s behind the rise in U.S. corporate profits?, Supply Chain Quarterly

As I lamented about in an earlier article, U.S. companies prefer share buybacks than raising dividend payouts. The dividend payout ratio for the S&P 500 currently stands at about 27.4% compared to 40 to 60% prevalent from the 1950s thru the 1980s as shown in the chart below:

 

Source: Dividends Deliver, Eagle Asset Management

Clearly while companies can raise dividend payout significantly many are not doing so. Unless shareholders hold managements accountable, demand higher payouts and in general a shift in dividend culture occurs the current low payout ratio may remain for years to come.

Related ETFs:

SPDR S&P 500 ETF (SPY)

PowerShares QQQ Trust (QQQQ)

iShares S&P 500 Index (IVV)

Disclosure; No Positions

Relationship between Stock Market, GDP and Earnings

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In an article last year on the relationship between economic growth and equity returns in emerging markets I wrote:

“In a study of 16 major markets by the Vanguard group, the correlation  between economic growth as measured by GDP per capita and long run stock returns since the 1900 was effectively zero.”

However a recent research by Alliance Bernstein on this subject noted that equity returns tend to rise with economic growth in the long-term for the US market.

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From the report:

Historically, earnings and the stock market have grown with the economy over time, although they can diverge for several years at a stretch, particularly if market euphoria drives stock prices to very high multiples of earnings, or gloom drives stock prices to low multiples. Nominal US GDP2 (which includes inflation) has grown 7% a year onaverage since 1947—and so have the S&P 500’s earnings and price (Display 4).

Source: The Fundamental Case for the 20,000 Dow by Seth J. Masters, Bernstein Global Wealth Management

Dividend Yield and P/E Ratio by Country

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The dividend yield and P/E ratios of select markets at the end of September, 2012 are shown in the graphic below:

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Source: 

Income alternatives: The power of global dividends, DWS Investments

The U.S. dividend yield continues to stay at about 2%. Among the emerging markets India has he lowest dividend yield at 1.33%.

Some related ETFs:

iShares Dow Jones U.S. Select Dividend ETF (DVY)
PowerShares Dividend Achievers ETF (PFM)
Vanguard Dividend Appreciation ETF (VIG)
SPDR S&P Dividend ETF (SDY)

Disclosure: No Positions