The High Cost of Actively Managed Investment Funds (2024)

FAQs

What are the costs of actively managed funds? ›

A reasonable expense ratio for an actively managed portfolio is about 0.5% to 0.75%, while an expense ratio greater than 1.5% is typically considered high these days. For passive funds, the average expense ratio is about 0.12%.

Usually, they are more expensive than passively managed index funds because of the costs associated with having fund managers actively seek out securities they feel will help their funds outperform corresponding indexes.

Passive investing is often less expensive than active investing because fund managers are not picking stocks or bonds. Passive funds allow a particular index to guide which securities are traded, which means there is not the added expense of research analysts. Even passively managed funds will charge fees.

“Active” Advantages

Flexibility – because active managers, unlike passive ones, are not required to hold specific stocks or bonds. Hedging – the ability to use short sales, put options, and other strategies to insure against losses.

Actively managed funds generally have higher fees and are less tax-efficient than passively managed funds. The investor is paying for the sustained efforts of investment advisers who specialize in active investment, and for the potential for higher returns than the markets as a whole.

Disadvantages. There are fees involved when investing in a managed fund, as you are hiring the service of the fund manager to produce returns on your investment. The amount of fees can vary greatly and can have a significant impact on your overall returns.

As global stocks and bonds roared back to life in the first half of 2023, so did the fund managers that actively buy and sell them. Over the 12 months through June 2023, 57% of actively managed funds survived and beat their average passive peer, their highest success rate in years.

The risk level of a managed fund depends on the asset classes the fund invests in. Investments such as cash or fixed interest are lower risk and aim to provide regular income and protect the capital invested. Growth investments like property or shares are higher risk, but offer a higher potential return.

Another driver of the underperformance of active funds, according to McDermott, is fees: “All funds have years where they underperform, however, the longer-term evidence is undeniable that active managers have continued to struggle. The main reason for this underperformance is because active funds charge higher fees.”

No actively managed stock or bond funds outperformed the market convincingly and regularly over the last five years. Index funds have generally been better.

Do actively managed funds generally have lower expenses than passively managed funds? ›

Expense ratios of actively managed funds, which require ongoing analysis and portfolio management, are typically higher than passively managed funds.

Actively managed funds require a hands-on approach where a manager decides how funds are invested, while a passively managed fund is more hands-off and typically follows a market index, such as the S&P 500.

The goal of the actively managed mutual fund is to outperform a benchmark index, such as the S&P 500, by selecting a portfolio of stocks they believe will deliver superior returns.

They come with many advantages, such as advanced portfolio management, risk reduction, and dividend reinvestment; however, there are many disadvantages to consider as well, such as high expense ratios and sales charges, tax inefficiencies, and possible management abuses.

Only one out of every four active funds topped the average of their passive rivals over the 10-year period ended December 2022. But success rates vary across categories. Long-term success rates were generally higher among bond, real estate, and foreign-stock funds, where active management may hold the upper hand.

With 1408 ETFs traded on the U.S. markets, Active Management ETFs have total assets under management of $624.35B. The average expense ratio is 0.71%. Active Management ETFs can be found in the following asset classes: Currency.

Just one out of every four active funds topped the average of passive rivals over the 10-year period ended June 2023. But success rates vary across categories. Long-term success rates were generally higher among bond, real estate, and foreign-stock funds, where active management may hold the upper hand.

The management fees may or may not cover not only the cost of paying the managers but also the costs of investor relations and any administrative costs. Fee structures are usually based on a percentage of assets under management (AUM). Fees tend to range from 0.10% to more than 2% of AUM.

Factoring in 0.5% to 0.75% for actively managed fees is considered to be around the average. Another type of fee that investors may encounter when buying or selling ETF shares is trading commissions. These fees are charged by brokers and can vary depending on the specific broker and ETF.