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.
- 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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