Pay less. Earn more.

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A significant factor in the performance of mutual funds is their internal expense ratio (“management fee”). This is because mutual fund performance is reported “net of fees.” In other words, if the mutual fund manager earned 10% for the year and their fund’s expense ratio was 0.50%, investors who had money in that mutual fund would earn 9.50%.

In addition to the academic research that shows the long-term under performance of actively managed mutual funds, a major reason we use index mutual funds in client accounts is that they cost less and provide predictable market returns.

In 2018, the Investment Company Institute® reported that actively managed mutual funds investing in equities (stocks) had an average internal expense ratio of 0.78% while the average internal expense ratio of passively managed index mutual funds was only 0.09%.

This fee differential means that to keep pace with an index mutual fund, an active mutual fund manager will have to outperform the index by 0.69% every year.

And while the manager of an active fund will beat their index from time to time, the evidence shows that they won’t keep outperforming the index year in and year out over the long term.