Investors who’ve opted to passively track the stock market haven’t just outperformed most active fund managers. They’ve also saved a ton of money in fees while doing it.
Why it matters: There are loads of active fund managers aiming to beat the returns of funds that track indexes like the S&P 500.
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Because these fund managers are much more hands-on, closely monitoring activity and trading often, they come with higher costs.
By the numbers: Over the past 25 years, the average active equity fund had an expense ratio of 95 basis points, according to ICI data analyzed by S&P Dow Jones Indices. In other words, they charged $0.95 per every $100 invested.
During that same period, index funds carried an average expense ratio of just 17 basis points, or $0.17 per $100 invested.
From 1996 to 2020, the amount of money invested in index funds tracking the S&P 500, S&P 400 and S&P 600 ballooned to $5.72 trillion, from $595 billion.
Had those incremental dollars been invested in actively managed funds, investors would’ve paid an extra $357 billion in management fees, S&P Dow Jones Indices analysts estimate.
What they’re saying: "Lower cost is one of the simplest explanations for the success of passive management," Anu Ganti, senior director of Index Investment Strategy at S&P Dow Jones Indices, tells Axios.
Yes, but: Many fund managers will point out that their clients aren’t always out there to just beat broad market indices.
"One problem with index investing that low fees can’t solve for is the insanely low dividend yields of equity indices," David Bahnsen, chief investment officer, The Bahnsen Group, tells Axios.
"The yield on the S&P 500 is 1.25%, which is far too low to meet many investors' income needs. Active management costs a tad more in fees, but can generate dividend yields, even after the manager's fees, of 4%, which is more than triple the yield of the broad stock index funds."
Zoom out: Bahnsen's point is that some investors have particular needs, like an S&P 500-like risk profile but with a higher level of income, that may not be offered by the available index funds.
The bottom line: Costs vary greatly in the investment business. But so do the objectives provided by the various investment offerings.
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