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Illustration: Sarah Grillo/Axios

Investors who’ve opted to passively track the stock market haven’t just outperformed most active fund managers. They’ve also saved a ton of money in fees while doing it.

Why it matters: There are loads of active fund managers aiming to beat the returns of funds that track indexes like the S&P 500.

  • Because these fund managers are much more hands-on, closely monitoring activity and trading often, they come with higher costs.

By the numbers: Over the past 25 years, the average active equity fund had an expense ratio of 95 basis points, according to ICI data analyzed by S&P Dow Jones Indices. In other words, they charged $0.95 per every $100 invested.

  • During that same period, index funds carried an average expense ratio of just 17 basis points, or $0.17 per $100 invested.
  • From 1996 to 2020, the amount of money invested in index funds tracking the S&P 500, S&P 400 and S&P 600 ballooned to $5.72 trillion, from $595 billion.
  • Had those incremental dollars been invested in actively managed funds, investors would’ve paid an extra $357 billion in management fees, S&P Dow Jones Indices analysts estimate.

What they’re saying: "Lower cost is one of the simplest explanations for the success of passive management," Anu Ganti, senior director of Index Investment Strategy at S&P Dow Jones Indices, tells Axios.

Yes, but: Many fund managers will point out that their clients aren’t always out there to just beat broad market indices.

  • "One problem with index investing that low fees can’t solve for is the insanely low dividend yields of equity indices," David Bahnsen, chief investment officer, The Bahnsen Group, tells Axios.
  • "The yield on the S&P 500 is 1.25%, which is far too low to meet many investors' income needs. Active management costs a tad more in fees, but can generate dividend yields, even after the manager's fees, of 4%, which is more than triple the yield of the broad stock index funds."

Zoom out: Bahnsen's point is that some investors have particular needs, like an S&P 500-like risk profile but with a higher level of income, that may not be offered by the available index funds.

The bottom line: Costs vary greatly in the investment business. But so do the objectives provided by the various investment offerings.

Go deeper

Dan Primack, author of Pro Rata
Oct 26, 2021 - Economy & Business

Scoop: Sequoia Capital just blew up the VC fund model

Illustration: Aïda Amer/Axios

Sequoia Capital, one of the world's oldest and most successful venture capital firms, is forming a single fund to hold all of its U.S. and European investments, including stakes in publicly-traded companies, Axios has learned.

Why it matters: Venture capital is the money of innovation, but the industry itself rarely innovates. This is a radical exception.

Study: Heartland lags in entrepreneurship

Expand chart
Data: Heartland Forward; Chart: Will Chase/Axios

A Heartland Forward report out today outlines six key factors that policymakers can influence to promote entrepreneurial growth in the middle of America.

  • The organization is a Bentonville-based think tank focused on improving economic performance in the 20-state region in the center of the U.S.

Why it matters: A healthy entrepreneurial ecosystem can help sustain an area's economy by creating jobs, elevating standards of living and supporting other businesses.

State of play: In 2016, there were about 3.3 million workers at young firms (five years old or less) in the heartland, which accounted for 9% of all jobs in those states. Nonheartland states had 9.3 million workers at young firms.

  • Zoom in: Capital investment in Arkansas startups is low compared to many other areas.

What they did: Researchers built the index on data about young companies, including several factors like populations with bachelor's degrees, households with computers, access to investment capital and government grants.

  • As part of the report released today, the organization published an interactive calculator so state policymakers can see how adjustments in one area will impact their index.

Threat level: Texas is the only heartland state ranking in the top 25 of the entrepreneurial capacity index. It's No. 14.

  • 16 of the lowest 20 positions on the index are heartland states.
  • Arkansas, known for entrepreneurs like Sam Walton, John W. Tyson and J.B. Hunt, ranked No. 46 on the list.

What they found: Researchers point out steps state policymakers can take to boost entrepreneurship.

  1. Fund entrepreneurial support organizations, such as chambers of commerce or business networks that help build relationships and collaboration.
  2. Earmark state-level funding for investment in young firms.
  3. Improve access to high-speed internet, which helps provide opportunities for remote work and learning.
  4. Invest in higher education since there is a direct correlation to the percentage of the population with a bachelor's degree or higher with entrepreneurship.
  5. Teach entrepreneurial thinking in K–12 schools to perpetuate economic growth and provide underprivileged populations education that may lead to business ownership.
  6. Tap into initiatives like the Community Growth Program and Toolkit that help stimulate entrepreneurial thinking on a micro level.

What they're saying: Liz Hubing with Iowa City Area Development Group hasn't yet seen the report or interactive calculator but tells Axios it will be a welcome resource.

  • Having data that show her fellow competitive Iowans how the state can advance will be a valued resource, she says.

What to watch: Researchers at Heartland Forward tell Axios they plan to publish a similar entrepreneurial index for a city-by-city level in early 2022.

Editor’s note: The graphic above has been corrected to reflect the accurate state abbreviations for Kansas ("KS") and Missouri ("MO").

Surprising pandemic side effect: Soaring trade deficits

Source: Census Bureau and Bureau of Economic Analysis; Chart: Axios Visuals

Inflation and jobs may get all the economic headlines, but meanwhile a big shift is taking place in the underpinnings of the world economy: The U.S. trade deficit is soaring.

What's happening: Americans' spending on imported physical goods has gone through the roof, while exports are growing slowly, making the U.S. the world's consumer of last resort.