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INDEX FUNDS VS. ACTIVELY MANAGED FUNDS

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The Wealth Advisor Contributor
March 24, 2022

(The Sun) - When it comes to investing, there has been a long ongoing debate
among individual investors and financial advisors about investing in actively
managed mutual funds versus Index funds.


Anyone who has read this column over the last 20 years knows my vote goes to
index funds. At Capital Wealth Management, approximately 75% of our clients’
assets are invested in index funds.


An actively managed fund is typically run by a fund manager and or a team of
managers actively buying and selling stocks in an effort to outperform the funds
corresponding benchmark index, like the S&P 500, which measures the performance
of U.S. large company stocks, or the Russell 2000, which measures the
performance of U.S. small company stocks.


Unlike actively managed funds, Index funds are not trying to outperform a
particular index or asset category. They are designed to match the performance
of the particular asset category of stocks like the S&P 500 and Russell 2000.


Since 2002, S&P Dow Jones Indices has published its S&P Indices Versus Active
(SPIVA) scorecard, which compares the performance of actively managed mutual
funds to their appropriate index benchmarks. In 2021 SPIVA report shows that
79.6% of all actively managed U.S. stock funds underperformed their index.




Over the last 10 years, 86.1% underperformed, and over the last 20 years, 90.3%
of actively managed U.S. stock funds have underperformed their index.


One big reason why index funds outperform actively-managed mutual funds over the
long term is that index funds have much lower expenses. The average mutual fund
has a total annual expense ratio of about 1.2%; index funds have an average
annual expense ratio of 0.5%. Vanguard’s Admiral Index funds have an average
expense ratio of just 0.1%. This means an index-fund investor can begin each
year with a 1.1% head start on actively-managed funds. How much of a difference
can that make?


On a retirement savings portfolio of actively managed mutual funds worth $1
million dollars, $12,000 is automatically withdrawn from the account to pay the
manager of the fund versus only $1,000 for an index fund … a difference of
$11,000. And you’re paying that extra $11,000 a year for what? For investment
performance of an actively managed fund that is about 85 to 90% guaranteed to
not perform as well over the long term as an index fund?
 

By MARTIN KRIKORIAN
March 24, 2022

Martin Krikorian, is president of Capital Wealth Management, a registered
investment adviser providing “fee-only” investment management services.


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