As frequent readers of The Financial Woman know I am a believer in index investing through either index mutual funds or ETF’s (Exchange Traded Funds). The statistics vary regarding the number of active portfolio managers that actually beat index performance but the numbers are usually in the 10 to 15% range. I am always on the lookout for articles that explore this comparison so this recent post on Forbes.com entitled Intro to Index Funds by Zack O’Malley caught my attention. Follow the link below to read the full article. I found the following points especially interesting:
According to a 2006 study by economists Laurent Barras and Russell Wermers of the University of Maryland and Olivier Scaillet of the University of Geneva in Switzerland just 14% of active managers beat the market by a statistically significant margin in 1990. By 2006 the figure had plunged to 0.6% after fees thanks to the rising fees charged by mutual funds.”
“Management fees for actively managed equity mutual funds run around 1.5% on average–on a straight-line basis not the lower asset-weighted one the industry likes to tout. That’s 15 times the 0.1% you’ll pay to track a market index via a low-cost mutual fund or exchange-traded fund (ETF).”
“The 1.4 percentage point difference may not seem like a lot but it adds up over time. Let’s say you invest $5 000 in a mutual fund that charges a 1.5% annual fee. In 20 years assuming an average growth rate of 8% your $5 000 will have grown to $17 225. Sounds great but not compared to the $22 843 you’d have had if you’d invested the same amount of money in Fidelity’s Spartan 500 index fund whose fee is 0.1% for a minimum investment of $10 000 in a regular account or $500 in some retirement accounts.”
It is hard to beat the simplicity and low cost associated with indexing. Mutual funds that are actively traded are referred to as having “active” management while funds that invest in indexes are referred to as having “passive” management. Passive management occurs in both index funds and Exchange Traded Funds or ETF’s. If you want to learn more about the differences between index mutual fund and ETF investing this information is included in our Investing 101 course along with how to invest in each.