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Survey: Investors better off with passive index funds

By Warren S. Hersch

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Most of the people who paid a mutual fund manager in the last decade would have done better by investing in a passive index fund at a much lower cost, according to new research.

NerdWallet published this finding in a summary of results from a survey that examines more than 24,000 mutual funds and ETFS available to U.S. investors for the ten-year period ending on December 31, 2013. Of these, 7,943 were in existence for the full ten years.

The asset-weighted average return of the actively managed mutual funds over this period was 6.50% while the passively managed index products averaged 7.30%, the report states. Similarly, for equity funds the average return was 7.19% for active managers and 7.65% for passive funds. 

Index funds outperformed actively managed funds regardless of whether returns were measured by asset-weighted average, median, or a simple average, the survey adds.

“Past academic studies have indicated that professional investors are not worth the cost because the after-fee return is lower than that of the market index,” the report states. “Theoretically, active managers as a group will have a hard time outperforming the market over the long-run because professional investors are a large portion of the market and once fees are netted out, they are likely to underperform a passive index.”

Among the report’s additional conclusions:

  • Only 24% of professional investors beat the market over the past 10 years
  • Index funds outperform actively managed funds by 0.80% annually, but active managers have lower risk
  • Active managers outperform the index by 0.12% before fees, but charge more in fees than the value they create
  • Large funds significantly outperform small funds with much higher returns and lower risk
  • Smaller stocks are riskier than large stocks, but don’t necessarily deliver higher return
  • Growth stocks significantly outperformed value stocks over the past decade

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