Those prefer active management funds are very different from those that prefer passive management funds.
Active Mutual Funds vs. Passive Mutual Funds
Regardless of where one sits on the active vs. passive spectrum, it’s widely acknowledged that the advent of the Index Fund has radically changed the conversation for the individual investor.
One salient point that fund managers of actively managed funds want you to ignore is a comparison of costs.
Why?
Because actively managed funds are more expensive than passively managed funds.
‘The True Cost of Actively Managed Funds’, a popular ETF resource, makes some compelling points:
Know Thy Costs
Because through time, they will make a difference on how much money you have to fund your financial goal, whether it be retirement or something else.
It gets worse for actively managed funds with respect to cost, because not only do they have higher expense ratios but if the fund is held in a taxable account, then guess what?
Higher Income Taxes
Because actively managed funds buy and sell their holdings throughout the year, they have capital gains. They often have short term capital gains. Since you have to pay taxes on any capital gains you received in any tax year, regardless of whether you still own the fund or not.
That erodes the performance of the fund.
Summary of Costs For Actively Managed Mutual Funds
Higher expense ratios. Higher taxes. Oftentimes don’t beat the index they are benchmarked to.
While some index funds are more accurate than others, at the end of the day they are usually a better holding than an actively managed fund.
Next Step
Ready to take the next step and work with a fee-only CFP? Reach out to schedule a Discovery Meeting to learn more.