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I like to think of myself as a “tortoise” investor.

These animals are slow, methodical, and don’t exert too much energy. Hint: passive.

But oftentimes I get distracted by those whimsical active funds, showcasing their smart managers, sometimes superb performance, and glowing results.

Are they any better than my beloved passive ones?

Let’s find out.

Passive vs. Active Funds: A Data-Driven Analysis

The eternal battle between passive and active funds never stops. Let’s cut through the noise and dive into the nitty-gritty of expense ratios, performance, and long-term gains. In fact, a recent study by Morningstar states that in 2024, total ssets in US passive strategies surpassed those in active ones for the first time.

So, are active funds losing steam?

1. Expense Ratios: The Silent Fee Takers

Expense ratios are like those sneaky subscription services you forget to cancel—looking at you Wine.com! They quietly nibble away at your returns. These fees cover fund management, administration, and other costs. Active funds, with their research teams and stock-picking prowess, tend to charge higher expense ratios.

You should be getting something in return for thsoe fees - such as higher OVERALL performance. But do they deliver the goods? Sometimes yes, sometimes no.

Example, a Vanguard index fund vs. a Vanguard passive fund.

Here, both funds are large-cap equity blends. But take a closer look: VDEQX charges .31% more in fees, and has performed worse. It’s net performance is 11.81%-0.35% = 11.46% vs 15.46% for the passive fund. BOOM.

2. Performance: The Tortoise and the Hare

Active equity funds have barely outperformed passive funds (as in the chart below). And underperforming active funds are way below the rest - in fact, most active funds end up falling behind. Why?

• Market Efficiency: The stock market is like a hyperactive toddler—it absorbs information instantly. Finding undervalued gems is tough. Active managers are always looking for that needle in a haystack - some find it, some don’t.

• Passive Funds: These funds don’t play games. They track an index—usually the S&P 500—and stay the course. No frantic stock-picking. No sleepless nights. Just steady growth. It’s like investing on autopilot.

  

  Active vs Passive

3. The Long Game: Net Gains Matter

Let’s peek into the crystal ball (or maybe just historical data) to see who wins over the long haul:

• Active Funds: Some do outperform, but most active funds stumble, lag, and occasionally face existential crises. Their net gains? Meh.

• Passive Funds: These unassuming heroes keep chugging along. Their net gains compound quietly. Over decades, they leave active funds in the dust.

Sure, if the overall market is down, your index fund isn’t going to be up - it will decrease too. But an active fund may be outperforming at the same time, depending upon its strategy and risk.

The HARD part? You don’t know which ones will outperform, how their managers will navigate the market and what decisions they’re making day in and day out.

Example: Let’s say your passive stock index fund is up 5% for the year. The active stock fund you wanted to invest in is up too, 5.7%. Outperformed, right? Well,…

Let’s assume the active fund manager is charging .90% for their work. That means the overall net performance for their fund is actually 4.8% (5.7-0.9= 4.8).

Your shining, outperforming active fund isn’t shiny at all - it underperformed by 0.2% after everything is said and done.

Do your homework and read the fine print. No one ever knows which fund will outperform, but what you can control are costs. Consider your time horizon, risk, and make the best choice for yourself.

After all, the tortoise did win the race.

Save On,

Chris

Disclaimer: This is not financial advice. Past performance is not indicative of future results. Always consult a financial advisor before making investment decisions.