Index Funds Are Not a Silver Bullet
Performance and Fees
First let's consider the question underlying all the discussion about expense ratios: performance. Do index funds always perform better than active funds? The answer is no, they don’t outperform all of them, but they do outperform many of them. The question is, which active funds show signs of life and can they be spotted? Here are a few clues:
What this chart is saying is that you pay more fees to an active mutual fund manager than you do to Vanguard using their index funds. The expense ratio of the active manager (0.49%) vs the Vanguard index fund (0.09%) creates a large difference in fees paid as shown above. However, this difference in fees has absolutely no bearing on the return the hypothetical investor would receive.
I am neither smart enough nor daring enough to challenge the multiple Nobel Prize-winning economists who have tackled The Efficient Market Hypothesis. What I will say is that some markets are more efficient than others. Lack of efficiency favors active management.
Where you hold a given fund is just as important to factor in as what you invested your money in in the first place. If your assets are in a tax-deferred account like an IRA or a 401(k) index funds’ superior tax efficiency doesn’t matter. However, in a taxable brokerage account, it could matter. Remember it isn’t what you make, it’s what you keep.
So is it all just marketing from “Big Index”?
*Take the time to read Red Notice by Bill Browder. Not only is this an excellent book about investing in an emerging economy, it is also an excellent book about the politics and risks in Russia during the 1990s & 2000s.