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SPIVA(R) 2020 U.S. Scorecard, S&P Dow Jones Indicies, LLC.
SPIVA(R) 2020 U.S. Scorecard, S&P Dow Jones Indicies, LLC.

When it comes to sports, there are debates between fans comparing great athletes: Larry Bird vs. Magic Johnson, Muhammad Ali vs. Joe Louis, Tom Brady vs. Joe Montana. (For the record my votes go to Bird, Louis and Brady.)

And when it comes to investing, there have also been debates among individual investors and financial advisers about investing in actively managed mutual funds and index funds. Anyone who has read this column over the last 20 years knows my vote goes to index funds.

Ninety percent of our clients’ assets at Capital Wealth Management are diversified across multiple asset classes of both stock and bond index funds.

An actively managed fund is typically run by a fund manager and or a team of managers actively buying and selling stocks in an effort to outperform the fund’s corresponding benchmark index, like the S&P 500, which measures the performance of U.S. large company stocks). As a result, actively managed funds require more and are more expensive to run.

Unlike actively managed funds, index funds are not trying to outperform a particular asset category. They are designed to match the performance of the particular asset category of stocks (i.e., the S&P 500) and bonds (Lehman Brothers Aggregate Bond Index). They do this by simply investing in the same stocks or bonds within a particular asset class.

As a result of these differences in management style, index funds tend to have significantly lower expenses than actively managed mutual funds.

Since 2002, S&P Dow Jones Indices has published its S&P Indices Versus Active, or SPIVA, score card, which compares the performance of actively managed mutual funds to their appropriate index benchmarks. The 2020 SPIVA report highlights the performance of actively managed funds and index funds over the last 15 years.

As the accompanying chart shows, 87.2% of all actively managed U.S. stock funds were outperformed by the benchmark (or index) during this time.  Actively managed US Mid-Cap funds were beaten by their benchmark 81.4% of the time. Actively managed US Small-Cap funds underperformed their index 81.5% of the time. In fact, actively managed funds underperformed their corresponding index in all 12 asset categories of stock funds over the last 15 years.

When it comes to investing, there are some things investors cannot control. However, the one thing that all investors can control is how much they pay in fees. And reducing fees is one of the most reliable ways to increase returns without taking on any additional risk.

One big reason index funds outperform actively managed mutual funds over the long term is that index funds have much lower expenses. The average mutual fund has an annual expense ratio of about 1.4%; index funds have an average annual expense ratio of 0.5%. Vanguards Admiral Index funds have an average expense ratio of just 0.1%. This means an index-fund investor can begin each year with a 1.3% head-start on actively managed funds.

How much of a difference can that make? On an account worth $500,000, an investor’s annual cost in the index fund is only $500 compared to ,$7,000 for actively managed funds — a difference of $6,500. And you’re paying that extra $6,500 a year for what?

For investment performance of an actively managed fund, that is about 85% guaranteed to not do as well over the long term as an index fund.

Martin Krikorian is president of Capital Wealth Management, a registered investment adviser providing “fee-only” investment management services located at 9 Billerica Road, Chelmsford. He is the author of the investment books, “10 Chapters to Having a Successful Investment Portfolio” and the “7 Steps to Becoming a Successful Investor.” He can be reached at 978-244-9254,, or via email at

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