As with the most popular bond mutual funds, only 20% or 2 out of the 10, outperformed the average bond mutual fund. The average return for these ETFs was 5.39% annualized which was, once again, less than the returns for either the most popular bond mutual funds or even the average of all taxable bond mutual funds.

The same reasons as for popular stock ETF underperformance appear to apply for bond ETF investors. Rather than choosing investments that tended to allow a manager pick a relatively broader swath of bond investments, ETF investors often chose to invest in a narrower band of bond market segments. Over the subsequent half decade, the segments chosen by the ETF investors, while perhaps appealing at the time, once again did not prove the best places to be. In many cases, good bond fund managers (vs. narrower indexes) were able to guide their funds' investments into more profitable directions as conditions changed.

Why Do So Many Investors Wind Up in Market-Lagging Funds?

Many of the most popular funds chosen by investors are from a slate of offerings from the largest fund providers which include, at the top of the list, Fidelity, Vanguard, and American Funds. And Fidelity and Vanguard are among the biggest providers of 401(k)s which therefore include a number of their own funds in the list of funds available within the ensemble. Meanwhile, American Funds are distributed widely by investment advisors and brokers.

But beyond high availability and visibility, many investors perhaps choose these mainstream funds because they have more confidence in well-known funds that in the past have had pretty good track records.

But, as shown by the data above, the most popular funds often do not wind up being better choices, and often worse choices, than perhaps those that could have been chosen merely by throwing darts at a listing all funds.

At the start of this article, I suggested a surprisingly simple method of selecting funds that had a better chance of beating the average fund, or better yet, even the market indexes. This method is suggested by using the same kind of data analysis as is provided above. That is, from a pool of potential selections, we looked at those which would have beaten the average fund, and even the stock and bond benchmarks as well.

As you likely are aware, both Vanguard, Fidelity, and a few other investment companies are known as providing a very good overall slate of funds. But here, let's just focus on these two fund giants; if interested, you can check out the comparative performance of other fund company slates on your own.

Starting with Vanguard, if you look at Vanguard's total lineup of stock funds you will see a much larger percentage of these funds beat the S&P 500 index or the average fund than the data shown above.

In fact, 29 out of 48 Vanguard stock funds that have existed for the entire 5 years returned greater than 23% annualized over the last 5 years - or 60% (This includes "Investor" share class shares only to avoid repetition with additional share classes.)

Likewise, if you look at Fidelity's much bigger lineup of stock funds, you will see that out of 115 funds listed on their website with 5 year track records, 65 beat the index, or almost 57% (excludes commodity, alternative fund categories, and a myriad of Fidelity additional share classes).

For stock ETFs, Vanguard had 19 out of 33, or about 58%, which beat the index. (Note though that Fidelity only has 10 ETFs of its own and none have a 5 year track record yet; they instead offer hundreds of iShares ETFs.)

With bonds, the story may not be quite as clear. Vanguard had 4 out of 14 bond funds (excluding munis) or 29% beating the return of the average fund shown above, vs. the 20% for the most popular funds that were chosen by investors. Fidelity had 7 out of 25 funds, or 28%, with 5 year records beating the average fund.

Given these more favorable odds of success, if you have access to these Vanguard or Fidelity funds as listed on their respective websites, it might make more sense to pick almost any fund from these slates rather just the best known funds, or other well-known funds from other fund companies. Of course, one should always exercise care in selecting one's specific choices.

But what if investors are locked into qualified plans such as 401(k)s that do not offer choices from these two best known fund families?

With stocks, perhaps most should invest in funds that mirror S&P index itself, or a fund that invests in the total U.S. market rather than attempting to pick from less diversified offerings that are often found in funds that focus on certain types of assets, sectors, or in many specialized ETFs. With bonds, perhaps they should search for managed funds that allow the manager to select and occasionally reshuffle which areas of the bond market to keep the most assets in, rather than for funds that prescribe a relatively fixed investment position. Finally, perhaps they should be sure to do some research to see which managed funds have outperforming track records over the last 5 years (or better still, even more), preferably achieved by the same on-going manager.