Those that believe in efficient markets likely shouldn’t sit at the same dinner table as those that believe they can consistently beat the market…unless a lively ‘debate’ , to put it mildly, is sought.
I am not quite binary in the debate, although I do lean towards the Weak form of the Efficient Market Hypothesis.
Regardless of where one sits in this debate, I suspect everyone agrees that the advent of the Index Fund and more recently the Exchange Traded Fund, has radically changed the conversation for the individual investor.
One salient point that Fund Managers of actively managed funds want you to ignore at is a comparison of costs.
Why?
Because actively managed funds, by their nature, are more expensive than passively managed funds.
And while the irony isn’t lost on me that the article, ‘The True Cost of Actively Managed Funds’, is published by ETFdb, I still think it brings up some compelling points, which can be summed up as:
Know Thy Costs, Individual Investor. Because through time, they will make a difference on how much money you have to fund your goal, whether it be retirement or something else.
And while the article brings up a good topic, 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?
Yep.
Taxes.
Actively managed funds often have capital gains, and 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.
So hmmm…let’s see…..higher expense ratios. Higher taxes. Oftentimes don’t beat the index they are benchmarked to.
It better be a dang good actively managed fund to make it worth your money and your time.