David Vomund – And the Winner Is…

Submitted by Community Member and IVCBA Member David Vomund

When I began my career in the 1980s mutual funds advertised good performance and their insightful portfolio managers.  Some managers (Peter Lynch, for one) became celebrities.  At that time “low cost” funds were those without sales charges (called “loads”).  Indexing was in its infancy.  People thought it was crazy to own only an index rather than have a manager pick attractive stocks or do so themselves.  That was then.

The debate over active versus passive management appears to be over.  Thanks to their low fees index funds have outperformed most of their actively managed peers.  Last year only 38 percent of active managers outperformed their benchmark.  In fact, it’s been 15 years since the majority of active managers have outperformed.  That’s why total assets under management in passive ETFs, ETNs, and mutual funds ($13.29 trillion) just surpassed the assets with active management ($13.23 trillion).  

That wouldn’t have happened unless the market was efficient, or nearly so.  If analyzing a stock’s bullish fundamental or technical picture automatically would lead to outperformance, then actively managed funds would do better.  But if the analysis doesn’t lead to better decisions, then it’s best to keep costs minimal.  That’s where Vanguard comes in.

Vanguard is the market leader in index funds.  Since the funds simply track an index, they can have extremely low fees.  Vanguard’s S&P 500 Exchange-Traded Fund only charges 0.03 percent annually.  Other ETF providers like Schwab, SPDR, and iShares have joined the low-fee race.  

Of course, just because you own passively managed funds doesn’t make you a passive investor.  ETFs provide the flexibility to easily invest in specific areas of the market.  Momentum investors can buy growth ETFs like Nasdaq 100 ETF (QQQ) and quickly switch to defensive ETFs like Invesco S&P 500 Low Volatility (SPLV).  

All this doesn’t mean that individual stocks shouldn’t be a part of your portfolio.  In my managed accounts, I hold both index ETFs and individual stocks.  For clients seeking income, I’m happy to own Ares Capital (ARCC) and selected preferreds.  I’m also overweighting healthcare by owning stocks like Merck (MRK) and Amgen (AMGN).

By holding a combination of individual stocks (no cost of ownership) along with some low-cost index funds, an investor can build an attractive portfolio that overweights specific sectors while avoiding areas that are less attractive.  And all that can be done while paying very little in fees.  That is to our advantage.  

David Vomund is an Incline Village-based Independent Investment Advisor.  Information is found at www.VomundInvestments.com or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.