The Reality of Outperforming SPY and QQQ with Actively Managed ETFs

Investors often seek actively managed ETFs in the hope of outperforming major market indices, particularly those like SPY and QQQ. However, the quest for a consistently outperforming actively managed ETF has proven to be challenging. This article explores why actively managed ETFs have struggled to outperform SPY and QQQ over the long term and provides insights into why sticking with passive options might be the smarter choice.

Historical Performance of Actively Managed ETFs

Actively managed ETFs have gained popularity only relatively recently, with most notably increasing in popularity since 2021. Historically, very few actively managed ETFs have been around for more than 15 years. A quick search reveals that only nine ETFs have been around for at least 15 years as of 2024. Notably, none of these have outperformed SPY or QQQ over the past 15 years, especially given the current overvaluation of these market indices.

Performance Comparisons

Below is a comparison of the cumulative historical performance of various actively managed ETFs with SPY and QQQ over the past 15 years. The ETFs are represented in black, while SPY and QQQ are represented in green.

The only actively managed ETF that has come close to outperforming SPY is PSR Invesco Active U.S. Real Estate Fund. However, given the current state of real estate, PSR might face some headwinds in the coming months.

Alternative Options: The 3x Leveraged TQQQ ETF

If you're open to looking beyond actively managed ETFs, consider the 3x leveraged TQQQ ETF. Over the past 14 years, QQQ has gained 1012.4%, while TQQQ has gained a remarkable 13100%. A 10000 investment 14 years ago in TQQQ would now be worth over 1,319,753. This dramatic performance is a testament to the potential of leveraged ETFs, though it's essential to understand the risks associated with leverage.

Considering Fees and Potential Risks

The examples provided in the other answer highlight a few exceptional actively traded funds that have beaten SPY and QQQ over long periods. However, it's not always immediately apparent that these comparisons are of raw gains. It's crucial to factor in fees when evaluating returns. Many actively managed ETFs have higher fees compared to their passive counterparts, which can significantly impact overall returns.

For instance, ARKK, which appears in the list of winners, performed exceptionally poorly during the COVID meltdown. This demonstrates the erratic nature of short-term performance in actively managed ETFs. The broader lesson is that very few actively managed funds will consistently beat their respective index over a 15-year period. The chance of picking the right one is so low that it's not worth even considering it for significant investments.

The Case for Passive Investing

With such a low probability of outperforming the market indices, the prudent choice for most investors is to stick with passive ETFs. The SPY and QQQ, or even VOO for SP 500, require no additional research and sidestep the need to constantly evaluate past performance. A commonly cited statistic is that one in twenty actively managed funds will outperform their index over a 15-year period, making the odds of success exceedingly low.

For those who find passive ETF holdings too dull, consider a 50/50 split between SP 500 Value and SP 500 Growth ETFs. This diversification strategy increases the odds of aligning with market performance, as one will likely outperform the other over time.

In conclusion, while actively managed ETFs might offer the allure of higher gains, their historical performance does not support their effectiveness in consistently outperforming market indices like SPY and QQQ. Passive investing remains the more reliable strategy for long-term investors.