(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On a retirement savings portfolio of actively managed mutual funds worth $1 million dollars, $12,000 is automatically withdrawn from the account to pay the manager of the fund versus only $1,000 for an index fund … a difference of $11,000.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
Martin Krikorian, is president of Capital Wealth Management, a registered investment adviser providing “fee-only” investment management services.
