In March, we compared a a popular energy sector ETF and a comparable mutual fund with the idea being to figure out when relevant factors are considered, which vehicle is best for investors.
That comparison, which involved the Fidelity Energy Advisor Fund Class A (FANAX) and the Energy Select Sector SPDR (NYSE:XLE), showed the ETF coming out ahead on practically every relevant metric.
Unfortunately for mutual fund sponsors and, more importantly, investors in their funds, the superiority of passively managed ETFs over many actively managed ETFs is not confined to the energy sector. Investors wanting to find other examples of mutual fund failure relative to ETFs need look no further than one of this year's top-performing sectors: Health care.
Interestingly, truly compelling ETF/mutual fund comparisons come by way of the high-flying biotech sector. After the four major biotech ETFs hit new all-time highs last Friday, we became curious regarding how these ETFs stack up against equivalent mutual funds.
Finding the mutual funds was not hard. In early 2012, one source featured a list of the top-performing health care funds of which a few were biotech funds. Unfortunately, that source made the mistake of not clarifying between mutual funds and ETFs. Another source did investors an even greater disservice by mentioning just two high-fee biotech mutual funds.
So this is what investors would have been treated to with the Guggenheim Biotechnology mutual fund Investor Class (RYOIX): A year-to-date return of 26.5 percent and a one-year return of 44.8 percent as of April 19, according to Guggenheim data.
It is hard to argue with that, but indeed investors could be doing better with at least one biotech ETF. In the essence of making the comparison as fair as possible, we looked at the iShares Nasdaq Biotechnology Index Fund (NASDAQ:IBB) against the Guggenheim Biotechnology mutual fund. One reason for this comparison is that the ETF and mutual fund have comparable top-10 holdings (kudos to Guggenheim for updating theirs as of April 19, something not all mutual funds sponsors).
Additionally, both IBB and the mutual funds allocate close to 30 percent of their respective weights to biotech's big four Amgen (NASDAQ:AMGN), Biogen (NASDAQ:BIIB), Celgene (NASDAQ:CELG) and Gilead Sciences (NASDAQ:GILD).
IBB was also our ETF pick not because it is the largest biotech ETF by assets (it is with $2.88 billion), but because with an expense ratio of 0.48 percent, it is more expensive than rivals such as the SPDR S&P Biotech ETF (NYSE:XBI) and the Market Vectors Biotech ETF (NYSE:BBH). In other words, we were trying to give some advantage to the mutual fund in terms of fees.
For its part, IBB has slightly under-performed the Guggenheim Biotechnology mutual fund this year with a gain of 25.8 percent. Over the past year, however, IBB nudges past the mutual fund with a gain of 44.9 percent. Round up the performances of IBB and the mutual fund to say both are up 45 percent over the past 12 months and investors may wonder what is the difference. Oh, just 78 basis points in fees. As in the mutual fund charges 1.36 percent per year. To be fair, we could not find evidence of pesky loads on the Guggenheim web site.
Still, if the current performances of IBB and the mutual fund remain constant for the rest of this year, investors opting for the mutual fund will pay 78 basis points more for 70 basis points in additional returns. In other words, they will not come out ahead with the mutual fund.
Remember, we tried to be somewhat fair in this comparison by using IBB. Investors looking for a biotech ETF that represents a great value over plenty of comparable mutual funds ought to try the aforementioned Market Vectors Biotech ETF. That ETF is up nearly 65 percent in the past year and features annual fees of just 0.35 percent.
For more on ETFs, click here.
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