by Craig D. Price, Certified Financial Planner® and Will Thompson, Certified Financial Planners®, Certified Financial Advisor®, Stuart, Florida

Do you own an actively-managed mutual fund?  If you do, you are out of step with recent investment trends.  In 2015, investors pulled $308 BILLION from actively-managed mutual funds, the largest one-year redemption in history.  In contrast, investors channeled $375 BILLION into index mutual funds and Exchange Traded Funds (ETFs) (Mutual Fund Quarterly, Barron’s July 11, 2016).

Why is this tsunami of cash flowing into index investments?  It’s simple, actually.

  • Better performance
  • Lower fees
  • Greater tax efficiency

In today’s low return environment, performance matters more than ever. Morningstar Research reports that over 83% of actively-managed U.S. large cap growth funds performed worse than the comparable index fund for the ten years ending December 31, 2014 (Morningstar,  June, 2015 ).  Likewise, active mid-cap blend funds performed worse than the mid-cap index over 87% of the time for the same ten-year period.  Taken as a group, Morningstar analysts found nearly 60% of all active mutual fund categories performed worse than their comparable index fund in the 2004-2014 period.

Low fees are a critical contributor to the superior performance of index funds and ETFs. In 2015, the average actively-managed mutual fund charged a fee, or expense ratio, of 0.84% annually. (Investment Company Institute 2016 Factbook) The average passive index fund charged just 0.15%. Better yet for thrifty investors, the largest index funds sport rock bottom expense ratios of just 0.05-0.07% a year. With index funds and ETFs, low fees are a structural advantage for shareholders.

Index funds and ETFs are far more tax efficient than actively-managed funds. Actively-managed mutual funds are obligated to pay net capital gains to their investors in the year that profits within the fund are realized. Index investments seldom distribute capital gains to shareholders due to their infrequent trading and low portfolio turnover.

As more investors and advisors recognize the advantages of index investments, the exodus from active mutual funds continues.  In June, 2016, investors pulled $21.7 billion from active funds, the largest monthly withdrawal since October, 2008.  Vanguard, on the other hand, set a record by amassing $148 billion of new assets – primarily into index funds – in the first 6 months of 2016.

(Source: Mutual Fund Flow Data ).

The clients of Price Wealth Management have enjoyed the benefits of index investments for many years due to their better performance, lower fees, and tax efficiency.  Despite their growing popularity, the advantages of index investments are still under-appreciated by many investors.  In fact, there remains more than $10 trillion invested in higher-fee, actively-managed mutual funds.  If your portfolio is invested in actively-managed mutual funds, perhaps it is time for you to reevaluate your investments, and your advisor, as well.

Craig Price, CFP®, is CEO of Price Wealth Management, LLC located in Stuart, FL.  The firm is an affiliate of Registered Independent Advisor (RIA), Great Lakes and Atlantic Wealth Advisors.

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