SPY Class of 1993 Success Story

• By Max Rottersman
• On 12:57 pm EST, Friday December 5, 2008

HANOVER, NH (ETFguide.com) - Fifteen years ago, in 1993, S&P Deposity Receipts (AMEX: SPY - News) went up against a who's who of fund heavyweights: Fidelity Magellan (Nasdaq: FMAGX - News), Legg Mason Partners Fundamental Value (SHFVX), MFS Growth Stock (Nasdaq: MIGFX - News), Oppenheimer Equity (Nasdaq: OEQAX - News), Putnam Investors (Nasdaq: PNVBX - News), T.Rowe Price Blue Chip Growth (Nasdaq: TRBCX - News) and 57 others.  It slew them.

SPY currently has an annual return of 6.79%.  Only 18 mutual funds are ahead of SPY today.   Alger Capital Appreciation is at top, with an 8.94% return.  But for the past year it has been trailing its benchmark.  What has SPY got that it's competition doesn't?  Ultra-low fees.  In a sense, SPY rebates every investor 1% of assets every year.  It adds up.

You can find more detail at FundAnalyze.com.The site will also analyze your portfolio and show low-fee substitutes.

The funds caught in SPY's web are losing $865 million a year in return on a $572 million in fees. To a random-walker, this makes perfect sense.  In the long-run, high fee funds are expected to transfer wealth from the shareholder to fund manager in the amount of the fee.  

The alpha-generating funds bill $340 million for an annualized $375 million excess wealth to the shareholder.  Yet any investor who chose any actively managed fund over SPY in 1993 faced what would become 2 to 1 odds of losing; that is, if they picked a fund that survived.

In SPY's large-anything category, roughly one-third of all fund classes in 1999 are no longer valid in 2008.  That's 608 fund classes out of 1,573.  We can conservatively conclude that hundreds of funds were so far behind SPY that they liquidated or merged.  

SPY has probably beat not 58 funds, but 258 funds.  The odds were more like 15 to 1 against any investor in 1993 beating SPY with an alternate fund.

Max Rottersman is a principal of Hanover Technology Group, LLC. His opinions don't necessarily represent the views of ETFguide.com or Yahoo Finance.

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