LCF: This Large-Cap Focused ETF Can't Overcome Its Own High Fees

An analysis of the Touchstone US Large Cap Focused ETF (LCF), an actively managed fund with a 0.56% expense ratio and $47 million AUM, reveals a growth-at-a-reasonable-price strategy that has underperformed the S&P 500 over the last decade. Despite a solid construction and a 58% active share, the fund's inability to consistently outperform SPY, especially considering its fees, suggests that investors may be better served by simple S&P 500 index ETFs.

Analysis

The Touchstone US Large Cap Focused ETF (LCF) is an actively managed fund with $47 million in assets under management and a net expense ratio of 0.56%, benchmarking against the S&P 500 Index. Although the ETF launched three years ago, its sub-advisor has utilized the underlying growth-at-a-reasonable-price strategy, which targets 25-45 stocks believed to be undervalued, since October 2013. Despite a portfolio structure characterized by solid GARP features, LCF's 58% active share with the SPDR S&P 500 ETF Trust (SPY) is considered insufficient to consistently generate outperformance, particularly when factoring in its expense ratio (1.29% before waivers, 0.56% net). Significantly, the strategy has not managed to outperform SPY over the last ten years. This historical underperformance, coupled with the fund's cost structure, suggests LCF does not present a compelling case for deviating from simpler, lower-cost S&P 500 Index ETFs. The moderately negative sentiment (-0.4 overall, -0.6 for LCF) underscores concerns about its ability to justify its active management approach.

Key Decisions for Investors

• Investors should critically evaluate LCF's decade-long underperformance against its S&P 500 benchmark before considering an allocation, as its 0.56% net expense ratio has not been offset by superior returns.
• Given LCF's 58% active share, which implies substantial overlap with the S&P 500, investors might question whether the potential for alpha generation justifies the active management fees compared to passive index-tracking alternatives.
• It may be prudent for investors seeking U.S. large-cap exposure to favor established, low-cost S&P 500 index ETFs, as LCF has not demonstrated a consistent ability to add value above its benchmark and associated fees.