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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
Aug 30, 2021 - Economy & Business

China takes aim at private funds

Xi Jinping at the Communist Party centenary in July. Photo: Qilai Shen/Bloomberg via Getty Images

China's increased scrutiny of capital markets isn't restricted to tech IPOs. It's also taking a harder look at private funds.

Driving the news: China's top securities regulator, Yi Huiman, today said in a speech that VC and buyout fund managers must better align their interests with those of limited partners, adding that the government is dedicated to rooting out embezzlement and public equities masquerading as private equities.

22 mins ago - Health

Other drug companies want to help make the vaccines

Illustration: Megan Robinson/Axios

Generic drug companies have asked Pfizer, Moderna and Johnson & Johnson to license their COVID-19 vaccine technology to help increase global production, but so far the vaccine makers have given them the cold shoulder.

Why it matters: Other companies are saying they have extra capacity to make more vaccines. Not using that extra capacity could prolong the pandemic throughout the world.

House passes $768 billion defense spending bill

Photo: Andrew Harrer/Bloomberg via Getty Images

The House approved a $768 billion National Defense Authorization Act (NDAA) for the 2022 fiscal year in a bipartisan 316-113 vote on Thursday.

Why it matters: The annual bill, which authorizes Pentagon spending levels and guides policy for the department, would require women to register for the military draft, among other provisions.