![]() ![]() ![]() The difference between the best-performing and worst-performing active strategy was about 1%. It's easy to be fooled into thinking that active fund management produces superior investment returns, but, according to a study by fund manager Meb Faber, all of the most popular asset allocation strategies active managers use produce about the same returns. Investing $100,000 in the mutual fund would return $320,000, while investing the same amount in the index fund would return $360,000. The expense ratio for the mutual fund, which is actively managed, is 2%, while the index fund's expense ratio is 0.40%. The expense ratio is important for investors who prioritize buying and holding stock investments because a seemingly small change in expense ratio can, over time, create substantial differences in investment returns.Ĭonsider a mutual fund that returns 8% per year for the next 20 years and a passively managed index fund that tracks a major stock market index and returns 7% per year for the same two decades. If the value of your investment in a fund is $1,000, and the fund's expense ratio is 1.5%, then you will pay $1.50 each year to the manager of the fund. Simply multiply the fund's expense ratio by the dollar value of your investment to compute your annual total fee. What you should calculate, based on a fund's expense ratio, is how much money you will pay to the fund on an annual basis. The easiest way to learn a fund's expense ratio is to review the general information section of the fund's fact sheet. While expense ratios can be calculated, they are generally given by the funds themselves. Many index funds have low expense ratios because they are passively managed by quantitative strategies rather than actively managed by subjective humans. Expense ratios are charged by mutual funds and exchange-traded funds (ETFs), which are a type of index fund. ![]()
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