We have conviction that this fund will outperform its category peers over the long haul. With roughly 100 more constituents than the flagship S&P 500, the MSCI USA Index provides very similar, equally broad, and diversified exposure to US large-cap stocks. A solid body of evidence shows that it is difficult for active managers to consistently outperform US large-cap benchmarks. As such, taking a passive approach for this particular exposure makes a lot of sense.
Over its history, the MSCI USA, just like the more high-profile S&P 500, has proved a difficult hurdle for many U.S. large-cap managers to clear. Many attribute active managers' collective struggles to beat index funds to the overall level of efficiency of the market for U.S. large-cap stocks. Efficiency in this case is meant to indicate the speed and precision with which market participants incorporate new information (economic news, earnings data, and so on) into stock prices (by selling on bad news, buying on good news). Furthermore, given advances in information technology and the growth in the portion of investable assets that is managed by an increasingly skilled set of professional investment managers, it can be argued that the market has become ever-more efficient over time. But market efficiency alone does not explain the long-term success of broadly diversified market-capitalisation-weighted index funds.
The second leg of the investment thesis for index funds is their cost advantage. Index funds are inherently less expensive to manage than actively managed alternatives. Their sponsors don't have to pay teams of well-educated and highly credentialed portfolio managers and investment analysts to identify under- or overvalued stocks to be added to or sold from their portfolios. Also, market-cap-weighted index funds have lower turnover relative to actively managed funds. Turnover has a price. Commissions, bid-ask spreads, and market-impact costs all add to the headwinds facing active strategies. Taken together, these costs are the largest and most persistent drag on the performance of actively managed strategies.
With an ongoing charge of 0.14%, the fund is not only one of the cheapest offerings in its Morningstar Category, which includes actively managed funds, but also one of the cheapest exchange-traded funds tracking the MSCI USA Index. Since its inception in 2012, this ETF's risk-adjusted returns have consistently ranked at the top of the first quartile relative to its Morningstar Category, which includes both active and passive funds.
With a low fee and a soundly constructed and reasonably representative benchmark, this fund is well positioned to continue its long streak of producing superior risk-adjusted returns relative its category peers. In terms of tracking performance, like most funds tracking the MSCI USA Net Return Index, the UBS MSCI USA ETF outperforms its benchmark because of favourable withholding-tax differences between the index and the fund by virtue of being domiciled in Ireland.
We have a favourable view of the Structured Beta & Indexing team at UBS. The team has remained stable and can draw on a wealth of industry experience when managing funds. All factors considered, we have awarded the UBS MSCI USA ETF a Morningstar Analyst Rating of Gold.