CNBC answered this question for us in a recent study to see if actively managed mutual funds did have the upper hand over index funds/ETFs.
In their study, they reviewed how large, mid, and small-cap actively managed mutual funds performed in comparison to their benchmark index, and the results were alarming.
Not only did they find that the majority of actively managed mutual funds failed to beat their benchmark index in a 1-year period (2019), they found that the number only increased as you expanded the time length.
As you increase the time length, the more difficult it becomes for mutual fund managers to outperform their benchmark index.
Are there actively managed mutual funds out there that do outperform their benchmark index?
Sure, but history shows that your ability to identify that mutual funds is slim.
So, if the majority of mutual fund managers who studied at expensive Ivy League schools can’t even beat the market, what makes you think that you have a good chance?
The long-term historical performance shows that you will benefit more by simply investing in an index fund/ETF, than trying to trust your money with an expensive mutual fund manager, who most likely will underperform their benchmark index over time.
So, what The difference between index funds and ETFs and actively manage funds?
Index Funds/ETFs
Objective: Match the performance of a benchmark index (e.g. S&P 500).
Strategy: Buy and hold all the securities in the benchmark index, it’s tracking.
Expense Ratio: US funds <= 0.05% / International funds <= 0.15%.
Tax Efficiency: Usually less taxable capital gains, due to buy and hold strategy leading to less trading.
Actively managed funds
Objective: Attempt to outperform a benchmark index (e.g. outperform the S&P 500).
Strategy: Manager buys and sells their own securities, based off their research/expertise.
Expense Ratio: US funds = 0.50 – 1% / International funds = 1 – 1.5%.
Tax Efficiency: Potentially more taxable gains, due to fund manager(s) trading more often.