During the first six months of this year passively-managed exchange traded funds have outperformed actively-managed funds, particularly in t...

During the first six months of this year passively-managed exchange traded funds have outperformed actively-managed funds, particularly in the smaller, more focused sectors, according to a report by Lipper, the Reuters-owned firm.

The Lipper pan European ETF report highlights monthly volume and turnover data at an aggregate level for the exchanges across Europe as well as for individual ETFs.

In 25 of the 36 Lipper global equity sectors, the ETF averages outperformed the mutual fund average over the first six months of the year. Only 11 of the 36 Lipper global equity sector averages outperformed the ETF average.

Lucas Garland, senior research analyst, Europe, told WealthBriefing: ”Passively managed ETFs in industry-focused sectors, such as pharmaceuticals or telecommunications, and also within emerging markets, have performed better than those that are actively managed.

“It raises the old question of active versus passively managed funds. Our research illustrates that is more difficult to actively manage in those smaller sectors.”

The large deviations between several focused sectors suggest product structure, in addition to asset allocation decisions, can have real financial consequences, he added.

In the pharmaceutical sector, the average actively-managed fund returned -7.08 per cent for the first half of 2006, whilst the comparable ETF returned 7.34 per cent, illustrating the flow and diversification mandate challenges active managers must overcome when competing in a narrow style.

Mr Garland said: “An active manager in traditional mutual funds will need to allocate new money into the fund, and this can come in waves depending on market movements, macro-economic events and market psychology.

“A manager would weight allocations and this has perhaps worked against them in these industry-focused and emerging market sectors where they have been outperformed by passively managed funds.”

Lipper noted that many of the ETF averages for a given sector represent the performance of a single ETF product.