Over the past 15 years, more than 92% of U.S. large-cap mutual funds have trailed the S&P 500…

Over the past 15 years, more than 92% of U.S. large-cap mutual funds have trailed the S&P 500…

— Stansberry Research

Today, more than 9,500 mutual funds crowd the U.S. market. Armies of professional money managers with impressive credentials and access to Bloomberg terminals pore over financial statements and conduct extensive research in search of insights that will give them an edge. They increasingly trade with other professional money managers. Institutional trading accounts for about 95% of trading volume.

Given the growing competition and the zero-sum nature of active management, you might expect the average mutual fund to perform about as well as the market. But that’s not the case. Over the past 15 years, more than 92% of U.S. large-cap mutual funds have trailed the S&P 500.

The vast majority of mutual funds underperform because the fees they charge more than negate any outperformance they’ve achieved by picking well-performing stocks.

Over time, these fees add up…

Let’s say you have a $100,000 portfolio, and you invest in a low-cost fund that tracks an index with a 5% annual return. This low-cost fund charges a management fee per year of 0.17%, which is the average asset-weighted fee for all passive funds. Your $100,000 would grow into more than $411,000 in 30 years.

Now let’s say you had invested in a high-cost fund, instead. This actively managed fund also earns 5% a year. And it charges a 1.14% annual fee, which is the simple average fee across all funds. Your $100,000 would only grow into about $311,000.

In our hypothetical example, the company managing the high-cost fund is essentially siphoning off around $100,000 of your money over 30 years… which is equal to your entire initial investment.

By design, passive funds are lower cost. Vanguard’s asset-weighted average expense ratio – the management fee that the fund charges investors – is just 0.11% per year. That compares with a much higher 0.75% asset-weighted average fee for active funds. And as we’ll show, many funds have fees greater than 1%.”

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