Is There An Actively Managed Fund Cheaper Than An Index Fund

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Dr_McGarvey
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Is There An Actively Managed Fund Cheaper Than An Index Fund

Post by Dr_McGarvey »

Unless managed by someone with overriding eleemosynary instincts, I don't think so. But I put the question on behalf of someone else and invite reasonable replies. Thanks, Bpgleheads.
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madsinger
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by madsinger »

There are some rather expensive index funds out there (like the 0.50% ER S&P 500 index fund in my 401-k plan) which cost more than many of Vanguard's actively managed funds, I can't imagine there are many (if any) actively managed funds that are cheaper than Vanguard's Total Stock Market fund with its ER of 0.05%.

(and, thanks for expanding my vocabulary today!)

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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by Stan Dup »

Possibly. There are many index funds that are not low cost. For example, I used to have my IRA money in an S+P 500 fund at Wells Fargo. I did benefit somewhat from the index philosophy. But when I really got serious about investing and reading up on the boglehead philosophy, I found that my funds had an expense ratio of 0.45%; not exactly low. Wells-Fargo took advantage of me as a naive investor. When I learned that the same money at Vanguard would only cost me 0.09%, I moved it.
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Aptenodytes
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by Aptenodytes »

There are two ways to get the answer, reasoning and data.

Reasoning tells you that the expense ratio will approach zero for a fund that is very large and very index-y. The Vanguard Total Stock Market has about a third of trillion dollars and, in the Admiral class, an ER of 0.05%. That's very large and very index-y, and it is hard to imagine someone beating it.

Regarding data you'd have to get a list of all funds and sort them by ER and flag them by whether they are actively managed or not. Let your friend do that.

If I'm going to invest in an actively managed fund I wouldn't want a fund that artificially depresses its ER. I want the management to work hard at whatever ploy I'm chasing. If I'm a cheapskate I'm sticking with index funds. I was in Magellan (at small grad-student levels) in the 1980s and in retrospect I don't regret having padded Peter Lynch's bank account.
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cfs
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by cfs »

None cheaper.

Good morning Doctor, in reference to expense ratio it is hard to find an active managed fund cheaper than "a Vanguard Index Fund" but not all plans offer those indexes at low cost.
I do remember my DW's first 401k plan (circa 1998) offering a Vanguard S&P 500 Index Fund with an ER of 1.50%. You have a Merry Christmas.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by livesoft »

Vanguard TIPS fund is actively managed. VAIPX has an expense ratio of 0.10%. There are several index funds of TIPS, many listed here:
http://altruistfa.com/tipsfunds.htm
Most have higher expense ratios than 0.10%. SCHP appears to be lower.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by SpringMan »

Vanguard has some. For example, admiral shares of Vanguard's Short and Intermediate Term Investment Grade bond funds (VFSUX, VFIDX) have an ER of .1% compared to admiral shares of Vanguard's Short and Intermediate Corporate Index funds (VSCSX, VICBX) which have an ER of .12.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by pkcrafter »

Dr_McGarvey wrote:Unless managed by someone with overriding eleemosynary instincts, I don't think so. But I put the question on behalf of someone else and invite reasonable replies. Thanks, Bpgleheads.
As already mentioned, the answer is yes if you consider the outrageous costs of a few index funds out there, but if you look at Vanguard's fund line up, then no. Vanguard is a not-for-profit company, so when you look at their stable of active funds, you'll also find the lowest cost active funds, but none are as low as the index offerings. Maybe I should add "in the same category" to be completely accurate.

SpringMan lists a few funds that appear to be exceptions, but lowest cost is dependent on the cost of investing in a particular style of bonds or stocks.

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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by SpaceCommander »

Berkshire Hathaway is essentially a fund. It has an expense ratio of zero. (And a pretty good fund manager too, I hear).

Index funds cannot beat zero. BRK.B

:happy
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by fposte »

Dr_McGarvey wrote:Unless managed by someone with overriding eleemosynary instincts, I don't think so. But I put the question on behalf of someone else and invite reasonable replies. Thanks, Bpgleheads.
I'd disagree slightly with some others and say the answer is sure, there are tons of actively managed funds cheaper than index funds, because there are a huge number of both and they cover an extensive range of expense ratios in each category. Even just looking at Vanguard funds you can find plenty of actively managed funds that are cheaper than some of their index funds, as has been noted (especially once you throw in Admiral class). The point isn't that all index funds are cheaper than all managed funds; it's that index funds will usually provide the cheapest way into an asset class.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by tludwig23 »

SpaceCommander wrote:Berkshire Hathaway is essentially a fund. It has an expense ratio of zero. (And a pretty good fund manager too, I hear).

Index funds cannot beat zero. BRK.B

:happy
"Essentially" is the key word. AAPL is essentially an S&P 1 index fund with an ER of 0.00 too. BRK.B still seems to carry the idiosyncratic risk associated with single securities.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by randomguy »

cfs wrote:None cheaper.

Good morning Doctor, in reference to expense ratio it is hard to find an active managed fund cheaper than "a Vanguard Index Fund" but not all plans offer those indexes at low cost.
I do remember my DW's first 401k plan (circa 1998) offering a Vanguard S&P 500 Index Fund with an ER of 1.50%. You have a Merry Christmas.

FTSE All-World ex-US Small-Cap Index and International Explorer. Same category and going active gives you a lower ER and higher return (well pretax at least).
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by Tanelorn »

Berkshire.
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Phineas J. Whoopee
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by Phineas J. Whoopee »

SpaceCommander wrote:...
Index funds cannot beat zero. BRK.B
...
They usually won't, but I believe that by engaging in securities lending it's possible one could. I have Institutional Index Institutional Plus, an S&P 500 index fund, in my 401(k). It has an ER of 2 bps. Vanguard normally only lends exotic securities, but it must be the case that lending profits could be higher than that tiny ER.

I don't know of any that do or have beaten zero, as you wrote.

PJW
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by placeholder »

Berkshire Hathaway is not a mutual fund of any sort.
IowaFarmBoy
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by IowaFarmBoy »

Berkshire doesn't quote an expense ratio but there have to be costs in managing the conglomerate. Anyone know how they account for these? Seems like they would just be treated as an expense of Berkshire Hathaway when calculating expenses and profits.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by cfs »

Concur.

Concur with our Shipmate Placeholder, Berkshire Hathaway is not a mutual fund, and I do remember when some investors were treating General Electric as a mutual fund too. You have a Merry Christmas.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by cfs »

randomguy wrote:
cfs wrote:None cheaper.

Good morning Doctor, in reference to expense ratio it is hard to find an active managed fund cheaper than "a Vanguard Index Fund" but not all plans offer those indexes at low cost.
I do remember my DW's first 401k plan (circa 1998) offering a Vanguard S&P 500 Index Fund with an ER of 1.50%. You have a Merry Christmas.

FTSE All-World ex-US Small-Cap Index and International Explorer. Same category and going active gives you a lower ER and higher return (well pretax at least).
Thanks for the good information. You have a Merry Christmas.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by pkcrafter »

placeholder wrote:Berkshire Hathaway is not a mutual fund of any sort.
+1


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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by SpaceCommander »

pkcrafter wrote:
placeholder wrote:Berkshire Hathaway is not a mutual fund of any sort.
+1


Paul
If you think Berkshire doesn't compare to a mutual fund, in my opinion, you are sadly mistaken. Here's a list of companies that make up Berkshire:

Acme Brick Company
Applied Underwriters
Ben Bridge Jeweler
Benjamin Moore Co
Berkshire Hathaway Energy Company
Berkshire Hathaway Homestate Companies
Berkshire Hathaway Specialty Insurance
BH Media Group
Boat U.S.
Borsheims Fine Jewelry
Brooks
Buffalo News, Buffalo NY
BNSF
Business Wire
Central States Indemnity Company
Clayton Homes
CORT Business Services
CTB Inc.
Fechheimer Brothers Company
FlightSafety
Forest River
Fruit of the Loom Companies
Garan Inc.
Gateway Underwriters Agency
GEICO Auto Insurance
General Re
Guard Insurance Group
Heinz
Helzberg Diamonds
H.H. Brown Shoe Group
HomeServices of America
International Dairy Queen, Inc.
IMC International Metalworking Companies
Johns Manville
Jordan's Furniture
Justin Brands
Larson-Juhl
Lubrizol Corporation
Marmon Holdings, Inc.
McLane Company
Medical Protective
MiTek Inc.
National Indemnity Company
Nebraska Furniture Mart
NetJets
Oriental Trading Company
The Pampered Chef
Precision Steel Warehouse, Inc.
RC Willey Home Furnishings
Richline Group
Scott Fetzer Companies
See's Candies
Shaw Industries
Star Furniture
TTI, Inc.
United States Liability Insurance Group
XTRA Corporation

Of course, that's just the list of companies completely owned by Berkshire. If we were to add their list of companies with significant Berkshire shareholder interest, the list would be much longer.

Who says Berkshire is not similar at all to a mutual fund? Really? I think the dissimilarity lies in the fact that BRK.B doesn't charge an expense ratio...
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georgewall42
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by georgewall42 »

Berkshire is a company that issues stock that trades on public markets. It is therefore subject to single company risk, something few mutual funds are subject to. Also, the majority of the company's revenues are derived from its insurance business, which is an industry in its own right.

Berkshire does, of course, incur expenses in managing these businesses and in managing its investment portfolio. Those expenses are accounted for in its profit-and-loss statement, although "investment expenses" are not broken out separately (not sure how it ever could or even should do that). Those expenses directly affect the company's profitability, and therefore indirectly affect its stock price. The company, like any C corporation, is not allowed to pass on those expenses to its shareholders. Mutual funds, however, are required to pass those expenses to the fund's shareholders. So while it's technically true that BRK stock has an expense ratio of 0, it's not really the correct comparison.

Berkshire is certainly an interesting and well run company. But it is a completely different entity from either an index fund or an actively managed mutual fund, and should never be confused with one.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by grabiner »

It can happen when the lowest-cost providers don't have an index fund, or are just getting one started with high expenses. One year after Vanguard took over International Explorer, it was the lowest-cost international small-cap fund, lower in cost than the iShares GWX. Then Vanguard opened its own international small-cap fund, and I believe International Explorer was still less expensive than the ETF class VSS in the first year. Now, VSS is at 0.20% and International Explorer is at 0.36%, but International Explorer is still less expensive than the Investor shares of the index at 0.40%.

You also have to consider other costs. When GWX was more expensive than International Explorer, I still held GWX, because GWX could be held in my taxable account, freeing up room in my Roth IRA for other funds.
Last edited by grabiner on Wed Dec 31, 2014 9:58 pm, edited 1 time in total.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by placeholder »

SpaceCommander wrote:If you think Berkshire doesn't compare to a mutual fund, in my opinion, you are sadly mistaken. Here's a list of companies that make up Berkshire:
None of which are publicly traded and so do not have their own rise and fall in share value or their independent boards so it is you that is sadly mistaken.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by Alex Frakt »

Time for everyone to cool down. The OP asked about mutual funds. BRK, GE or any other conglomerate is not a mutual fund, so it's not relevant to this topic.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by ruralavalon »

Dr_McGarvey wrote:Unless managed by someone with overriding eleemosynary instincts, I don't think so. But I put the question on behalf of someone else and invite reasonable replies. Thanks, Bpgleheads.
I bought Vanguard Intermediate Term Investment Grade Bond Admiral (VFIDX"), ER 0.10%, assuming it was an index fund just because of its low expense ratio. Is that an embarrassing lack of due diligence, or what? There are several intermediate term bond index funds with higher expense ratios,TIAA-CREF Bond Index, 0.12%, Dreyfus Bond Market Index, 0.15%, Northern Bond Index 0.15%, Vantagepoint Core Bond Index 0.16%, BlackRock Bond Index 0.20%, Voya US Bond Index 0.40%, and TIAA-CREF Bond Index Retail 0.48%.
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Re: Is There An Actively Managed Fund Cheaper Than An Index

Post by placeholder »

Alex Frakt wrote:Time for everyone to cool down.

Point taken and sorry for any contribution to "noise".
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