Let's say I manage an ETF offering exposure to Fictionaland, a booming economy that's difficult for investors to access otherwise. My fund returns 15% over a given period and the S&P500 only returns 10%. Am I beating the market? Am I a good ETF manager?
Would it change your mind if I told you the Fictional 500, the index my ETF tracks, had returned 30% over that same period? Would you maybe have some questions about how I managed my ETF?
You would compare your fund to an index maintained by a company like MSCI or S&P Global which covers Fictionaland. And you’d probably have a number of indexes for Fictionaland that could match depending on how your fund is composed.
You can compare Fictionaland funds to the S&P 500 and this can be a useful exercise. But you can’t determine if your Fictionaland fund is “good” unless you compare to a representative index — this is one with overlap of securities, but with likely different weights from the underlying index. And you’re going to have peer funds by other companies with slightly different methodologies, you’ll all compare to the same index, and your relative performance amongst competitors will mostly determine if you’re doing good.
Edit: I missed the management/performance question. If you run an ETF you are going to report holdings frequently, typically every day. If you run a mutual fund it’ll be less often, like every 60-90 days. So over time, you’ll be able to understand a bit about the trading methodology.
I can open an actively managed ETF tomorrow where I manually trade my portfolio such that it matches a passive index exactly. In fact I don't even have to tell anybody that that's my strategy or approach.
If that passive index outperforms the S&P500, then my actively managed ETF also outperformed the market.
Looking at the 500 largest(ish) companies in general is an arbitrary rules based strategy anyway. There's nothing inherent in the number 500 that dictates it will outperform vs other rules based strategies.
Would it change your mind if I told you the Fictional 500, the index my ETF tracks, had returned 30% over that same period? Would you maybe have some questions about how I managed my ETF?