[Poll] If all active funds have ER= 0.05%, will you buy any?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

If all actively managed funds charge ER = 0.05% (same as VTSAX, no fee), will you buy any?

Yes
61
45%
No
76
55%
 
Total votes: 137

Topic Author
acegolfer
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[Poll] If all active funds have ER= 0.05%, will you buy any?

Post by acegolfer »

One of many reasons why BH choose the index fund is for the low cost. What if all actively managed funds charge 0.05% (no fee)?

If yes, how will you choose the active fund or do you have any fund in mind?
Last edited by acegolfer on Sun Jun 22, 2014 7:25 pm, edited 1 time in total.
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mhc
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Re: [Poll] If all active funds have ER = 0.05%, will you buy

Post by mhc »

I would not choose an active fund for many reason. The first few reasons that come to mind are tax efficiency, style drift, and managing my AA for proper diversification.
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cheese_breath
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Re: [Poll] If all active funds have ER = 0.05%, will you buy

Post by cheese_breath »

I'm a KISS investor. I wouldn't know which one to buy or be willing to do the study necessary to possibly narrow down the field. I'd stick with index funds instead of risk picking a lemon.
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MN Finance
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by MN Finance »

If it was just about ER, the math of active and of passive is still the same. Math is math. But it's not just about ER
dickenjb
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by dickenjb »

Active funds in taxable accounts have lousy tax efficiency.

Even in tax deferred, their high turnover will lead to high costs which are not reflected in the expense ratio.
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stevewolfe
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by stevewolfe »

I have owned active funds for 15 years. I also own index funds. I would love to pay 0.05% instead of 0.71% for T. Rowe Price Capital Appreciation (which I've owned for the whole 15 years and posted about here many times). I would love to pay 0.05% for Vanguard Inflation Protected Bond instead of 0.20% in my 401(k). I'd love to pay 0.05% for Vanguard Equity Income (don't own it at 0.31% in my 401(k)). I'm sure folks here would love to pay 0.05% for Wellington and Wellesley or Pimco Total return for that matter as it's a popular fund here - all active funds. 0.05% would also look good on Vanguards actively managed Treasury funds about now as well... How about Vanguard International Explorer at 0.05% or Select Value for that matter... Lots of funds I'd consider at 0.05% (T. Rowe Price Real Estate and Emerging Market Bond are another two).
longinvest
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by longinvest »

Gross returns in the financial markets minus the costs of financial intermediation equal the net returns actually delivered to investors. See: http://www.vanguard.com/bogle_site/sp20060101.htm and http://www.stanford.edu/~wfsharpe/art/active/active.htm.

Therefore, one could get lucky and select a strategy that makes more than the overall market, but that means that someone else has to select another strategy that makes less than the market.

I prefer to stick to getting guaranteed market returns with a simple, tax-efficient Three Fund Portfolio.
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Svensk Anga
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by Svensk Anga »

I voted yes. My impression is that the studies done on active fund performance show that the managers do indeed have skill (well some of them), but it is not enough to overcome their costs. If the playing field is leveled by equal expense ratios, it becomes much more likely that an active fund can beat an index. Costs that do not show up in the ER would still matter, so one would want to look for managers that favored low turnover and who worked in market segments where spreads and impact costs are not a major issue.

I am not looking for these hot shot managers to work for minimum wage though, so will have to stick with indexing.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by stan1 »

If I could buy a DFA or AQR fund at 0.05% expense ratio WITHOUT paying a financial advisor I might be interested.

I can't so I haven't put a lot of thought into counting how many angels can dance on the head of a pin.
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Tanelorn
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by Tanelorn »

The story of active investing, even as told by its critics, isn't that there isn't skill or "alpha" in active management. However, the effects of fees, tax inefficiency, and manager selection make it hard in practice for individual investors to do better than indexes on a net-of-fees, after tax basis. If you removed the fees and for retirement accounts with no tax consequences, I would certainly find some active funds to invest in.

Here is a paper that reviews much of the literature discussing skill in mutual fund management. In particular, they cite studies showing about 10% of fund managers have persistent skill in terms of their pre-fee performance. Under OP's assumption, one would want to identify and invest in such managers and their funds. Note their results are that pre-fee performance is persistent and statistically significant, but post-fee performance (I.e. Investor returns) show basically zero outperformance and potentially negative performance after accounting for risk and excess trading costs.

http://www.sec.gov/divisions/riskfin/se ... 020213.pdf

They also do good job of debunking Sharpe's catchy but overly simplistic argument about the arithmetic of index investing (see page 12).
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Rob5TCP
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by Rob5TCP »

I have a large amount of Wellington, I might increase it a bit.
ASUGrad
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by ASUGrad »

I said no but let me add a BUT.

I wouldn't buy active funds, but at ER 0.05% there are a few passive funds I would buy that aren't your traditional index funds. Right now I tilt small cap just because I don't like how much of the total is large cap. I know that is how the market is set up, but I like the added volatility. One type of fund I would invest in if the ER was 0.05% would be an equal weighted index fund where each stock gets the same %. Needless to say it tilts heavily to the lower end of the given index. An equal weighted total would be insane(Apple only gets 0.03%), but I wouldn't mind having an equal weighted 500 index for my large cap stocks so the growing companies make a bigger piece than the established companies.
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acegolfer
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by acegolfer »

ASUGrad wrote:I said no but let me add a BUT.

I wouldn't buy active funds, but at ER 0.05% there are a few passive funds I would buy that aren't your traditional index funds. Right now I tilt small cap just because I don't like how much of the total is large cap. I know that is how the market is set up, but I like the added volatility. One type of fund I would invest in if the ER was 0.05% would be an equal weighted index fund where each stock gets the same %. Needless to say it tilts heavily to the lower end of the given index. An equal weighted total would be insane(Apple only gets 0.03%), but I wouldn't mind having an equal weighted 500 index for my large cap stocks so the growing companies make a bigger piece than the established companies.
This reminds me of a recent article "Monkeys Are Better Stockpickers Than You'd Think"
http://online.barrons.com/news/articles ... hp_popview
TareNeko
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by TareNeko »

ER is not the only issue of active funds.

(Potential) Incompetency of fund managers.
High turn over rates causing low tax efficiency (not an issue if money is in tax advantaged space).
Transaction costs due to high turn over rates.
ASUGrad
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by ASUGrad »

acegolfer wrote:
ASUGrad wrote:I said no but let me add a BUT.

I wouldn't buy active funds, but at ER 0.05% there are a few passive funds I would buy that aren't your traditional index funds. Right now I tilt small cap just because I don't like how much of the total is large cap. I know that is how the market is set up, but I like the added volatility. One type of fund I would invest in if the ER was 0.05% would be an equal weighted index fund where each stock gets the same %. Needless to say it tilts heavily to the lower end of the given index. An equal weighted total would be insane(Apple only gets 0.03%), but I wouldn't mind having an equal weighted 500 index for my large cap stocks so the growing companies make a bigger piece than the established companies.
This reminds me of a recent article "Monkeys Are Better Stockpickers Than You'd Think"
http://online.barrons.com/news/articles ... hp_popview
i read that same article. I liked the idea before reading that but it reinforced why I like it.
Bracket
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by Bracket »

Probably not. Sure if you lowered fees then the number of active funds that beat their index net of costs should increase somewhat, but I still wouldn't know in advance which ones were going to do so.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by Rodc »

ER is not the only cost. Need to factor in trading costs, so need turn over to be low to very low as well.

And needs to be well diversified.

At which point it is very likely a closet index fund.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by chaz »

I said no.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by bertilak »

Voted yes because I am already in active funds -- Wellington and Wellesley. Both are 0.18% ER.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by Doc »

acegolfer wrote:One of many reasons why BH choose the index fund is for the low cost. What if all actively managed funds charge 0.05% (no fee)?

If yes, how will you choose the active fund or do you have any fund in mind?
Basic criteria:

1) Not bad 3, 5 and 10 year risk adjusted performance. (Eliminates most bad managers.)

2a) Expense ratio less than category average or maybe lowest quartile. (Costs matter)
2b) Turnover less than category average. (Costs matter.)

3) Manager (or Index) tenure > five years preferably 10. (Good performance by the last manager or a previous index in the case of index funds doesn't count .)

4) Portfolio benchmark that meets my needs. (Duh.)

Much to my dismay 3) and 4) and sometimes even 1) sometimes eliminate even Vanguard index funds.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by Sheepdog »

Yes. I have had Wellesley for a couple of decades.
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telemark
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by telemark »

The goal is diversification at low cost. If a managed fund can give me that I will consider owning it. What I end up choosing will depend on what else is available. I own managed funds with much higher expenses because, well, you should see the other choices.

But hypothetical questions are not very useful. If the moon were made of green cheese, what would that do to dairy futures? I suspect any managed fund with expenses that low would have to be an index fund in effect, no matter how it's described in the prospectus.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by acegolfer »

telemark wrote: But hypothetical questions are not very useful.
It may not be useful to you. But it's useful to me.

I asked because I wanted to know why BH prefer index funds. I've got great responses on why some will not buy active funds, even if it's low cost.
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CABob
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by CABob »

I might select an active fund, but, would be very selective in what it was.
Bob
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acegolfer
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by acegolfer »

CABob wrote:I might select an active fund, but, would be very selective in what it was.
May I ask how you will select the fund?
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by tetractys »

If an active managed fund had an ER of %.05, then its investors would be gouged in some other, possibly heretofore unknown way. It would be a gimmick! So no, no, and no. -- Tet
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by indexmeasap »

I buy active if:

ER = fund CARG - (VG tsm CARG + 25 bpts)

That is, the fund manager pockets whatever he makes above and beyond the benchmark + 25 bpts. If the manager/fund company underperform, they pay out the short comings from their end.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by bnes »

Yes.
And I do keep some money in an active fund, but only
because a 401k offers it at half the retail expense ratio.

I would not use an active manager for large capitalization in the developed world.
Also as funds get huge, they become effectively closet index funds, and not worth owning.

For smaller and foreign stocks, I feel active managers have value to add.

My ideal would be a closed end fund that offers a strong performance bonus to the manager.
The Motley Fool Funds come close, but are super high expense overall.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by Ged »

Depends on what the competition is. My wife has a 401K plan that has only active funds. So we are in Wellington in this plan.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by MapleHermit »

Active funds not only under perform due to fees but due to market timing and being not properly diversified. There is no way to predict a manager's future performance and I doubt active funds can beat their own benchmarks consistently. There is an exception by focusing on heavy factor loadings but you have computerized index funds for this.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by fourwedge »

acegolfer wrote:
This reminds me of a recent article "Monkeys Are Better Stockpickers Than You'd Think"
http://online.barrons.com/news/articles ... hp_popview
Interesting article!

thanks
fw
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by sscritic »

I own this actively managed Vanguard fund. If the ER were lower, I am not sure I would own more than I do now. Not that I have an AA the way that the rest of you talk about an AA, but why would I change it just because the ER of one fund dropped from 0.20 to 0.05, like that's going to make a real difference in the long run?

Seriously, how many of you slice and dice with a tilt to low ERs? That's a new one for me.
Expense ratio
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by dbr »

I have used a stable value fund, which is as active as anything, and the cost is not nearly as low as 0.05%, so I guess the answer is yes. Is your question really about funds that try to beat the market by picking stocks and market timing?

Also, many of Vanguards Treasury bond funds are not index funds, but they are arguably "passive" funds, so the question is not about that?
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by sscritic »

I also own this one.
Expense ratio
as of 12/23/2013 0.17%
I have tried to find an money market index fund, but I don't see one, even at Vanguard.

[or is it money index market fund?]
grok87
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by grok87 »

dickenjb wrote:Active funds in taxable accounts have lousy tax efficiency.

Even in tax deferred, their high turnover will lead to high costs which are not reflected in the expense ratio.
agree.
estimates i have seen (Mr. Bogle?) are that for every 100% of turnover, the hidden expenses are 50 bps.
So a fund with a low expense ratio of 0.05% can easily be very expensive. if it had 150% turnover the hidden e.r. would be 0.75% and the "true" e.r. would be 0.80%.
also the fund managers have an incentive to have turnover high because they get kickbacks in the form of soft-dollar commissions.
yech!

http://en.wikipedia.org/wiki/Soft_dollar
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by origami »

stevewolfe wrote:... I'm sure folks here would love to pay 0.05% for Wellington and Wellesley or Pimco Total return ...
No, not at all. I wouldn't buy them with 0% ER.
I'm really surprised with the number of yes votes. I guess gambling is more popular than I thought.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by Doc »

grok87 wrote:
dickenjb wrote:Active funds in taxable accounts have lousy tax efficiency.

Even in tax deferred, their high turnover will lead to high costs which are not reflected in the expense ratio.
agree.
estimates i have seen (Mr. Bogle?) are that for every 100% of turnover, the hidden expenses are 50 bps.
So a fund with a low expense ratio of 0.05% can easily be very expensive. if it had 150% turnover the hidden e.r. would be 0.75% and the "true" e.r. would be 0.80%.
also the fund managers have an incentive to have turnover high because they get kickbacks in the form of soft-dollar commissions.
yech!

http://en.wikipedia.org/wiki/Soft_dollar
People with agenda's (Mr. Bogle?) often misuse or misinterpret statistics because of their bias, perhaps unwittingly or from good intentions.

We all agree that costs matter and that high turnover can increase trading costs. But it does not follow that all active funds have high trading costs and all index funds have low trading costs.

I did a very quick Morningstar screen to illustrate the point using large blend, turnover in the best quartile and distinct portfolios to eliminate multiple share classes.

(Fund Category = Large Blend)
(Distinct Portfolio Only = Yes)
(Turnover Ratio <= 21)

Out of 149 funds that passed this screen 88 or somewhat over 60% were not index funds.

Whether a fund is active or passive is not a good metric to use to chose low trading costs funds. On the other hand not choosing a fund with high turnover would seem to be prudent regardless of whether the fund is active or passive. A passive fund that changes its index every few years might be expected to have high turnover at times.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by IlliniDave »

I already own 3 with higher expense ratios ... at Vanguard: Intermediate-term Tax-exempt bonds, Prime Money Market, and Capital Opportunity Fund. I look at ER and turnover. If both are low, the fund is worth considering.

Edit: I forgot, I have a 4th--a little bit of Vanguard Precious Metals and Mining.
Last edited by IlliniDave on Fri Jul 04, 2014 5:41 am, edited 2 times in total.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by stevewolfe »

origami wrote: No, not at all. I wouldn't buy them with 0% ER.
I'm really surprised with the number of yes votes. I guess gambling is more popular than I thought.
Sorry but calling investing in an actively managed fund gambling is over the top for me. Particularly for me since my actively managed investment specifically is not trying to beat the market but is trying to match the return of the market over a business cycle with less volatility.

I've been in this fund fifteen years and many others here have been in low cost active funds much longer. To each their own, the poll seems about right to me...
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by MathWizard »

None except for one: VPGDX managed payout fund (ER .34%), which Vanguard lists as an active fund,

unless someone has another Vanguard fund that would send a check every month to my bank account
and take care of everything for me.

I am considering this as part of my base income for those years after I feel I can no longer, or no
longer want to handle my own investments. (I'm thinking I can turn on the autopilot around 75 and
go enjoy the world with my wife, and quit worrying about money.)
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by chaz »

No. I like index funds.
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sscritic
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by sscritic »

I only buy index funds, which is why I have my money in STBIX with an expense ratio of 0.34%. I don't care if active management could get that down to 0.05%; I would rather pay the extra 0.29% every year to be sure that no manager ever touched my money.

I am not confused. I know that "index" does not mean "low cost." They are different words.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by Doc »

sscritic wrote:I know that "index" does not mean "low cost." They are different words.
How about "low cost" does not mean "index". They are different words. :happy
sscritic wrote:... to be sure that no manager ever touched my money
:idea: That's a completely different criteria. One which I have not given much (any?) thought to.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by grabiner »

I have bought several active funds in tax-deferred accounts when the fund fit my investment needs and the cost was comparable. For example, I bought International Explorer in my Roth IRA when Vanguard took over the fund, and continued to hold some of it when it was less expensive than the competing ETF (GWX, SPDR international small-cap). When Vanguard opened VSS at a lower cost. I switched my GWX to VSS, and made new taxable contributions to VSS as I sold International Explorer.

And I expect many Bogleheads who believe in indexing do hold Vanguard's actively managed municipal-bond funds in preference to the index ETFs which are available; Vanguard's funds have index-like behavior and lower costs.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by Karamatsu »

Although I'm not dogmatic about it, I don't think active funds really suit me because, on average, I'm not convinced that there is any advantage to them (except to the fund managers). The only exception I can think of would be if a low-cost "active" fund gave me near-passive access to an asset class that I couldn't otherwise get. So for example, if there were a low-cost fund out there that focused on holding inflation-indexed Japanese government bonds, I'd be interested... as long as it didn't trade too much, didn't use leverage, and didn't play games with derivatives.

Such a fund should be attractive to managers, really, because there's almost no work involved in running it. Once they cover clerical and regulatory costs, they're done. But I imagine most managers would consider such a thing boring.
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by bottlecap »

Index funds beat active funds after costs. So low cost active funds don't have any advantage. If anything, a .05% expensie ratio would mean you are getting less research, thus less "advantage" out of the active funda.

I just don't think this is even a possible scenario. If it were, how would the active fund have more of an advantage anyway?

JT
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Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by sscritic »

bottlecap wrote:Index funds beat active funds after costs.
You can find expensive index funds if you try. Have you tried at all?

Here is one:
XXX Index Fund seeks to replicate as closely as possible, before expenses, the performance of the Index. XXX Index Fund seeks to achieve its investment objective by investing substantially all of its assets in the YYY Index Portfolio (the "Master Fund"), the "master fund" that has the same investment objective as, and investment policies that are substantially similar to those of, the fund. The Master Fund uses a passive management strategy designed to track the performance of the ZZZ. ... The Master Fund is not managed according to traditional methods of "active" investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Master Fund, using a "passive" or "indexing" investment approach, attempts to replicate, before expenses, the performance of the ZZZ.
Note how the one index fund invests all its assets in another index fund, the better to increase the fees.

Code: Select all

                      Class A†      Class B      Class C
Total expense ratio	 0.57%	      1.32%	     1.32%

Sales Charges / Dealer Allowance
$0-$49,999	     5.75% / 5.00%	 -- / 4.00%     --   
We need a contest. What is the most expensive index fund you can find?
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by acegolfer »

bottlecap wrote: I just don't think this is even a possible scenario. If it were, how would the active fund have more of an advantage anyway?

JT
I'm OP and I agree with the above statement. This was purely a hypothetical question.

The spirit of the poll was to find out why BHs use indexing strategy. If one said they will not buy a low cost active fund (many did), then low cost is not the only reason for indexing strategy. As many explained in their posts, there are other reasons why they use indexing strategy.
Johno
Posts: 1883
Joined: Sat May 24, 2014 4:14 pm

Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by Johno »

Like a lot of such questions the assumption of many of the answers might be 'active US stock mutual fund', in which case I'd vote no. If you open it up to all assets, then my answer would change. Exhibit A would be Vanguard's own junk bond fund, VWEAX in Admiral form, .12% ER. It's actively managed. It typically invests in higher quality issues than the junk benchmarks. History tends to show that gives better return relative to risk (BB range is historically the credit rating where you get the most additional spread per unit of default loss risk, and that fund is more concentrated there than an index junk fund).
ASUGrad
Posts: 259
Joined: Sun Oct 20, 2013 8:09 pm

Re: [Poll] If all active funds have ER= 0.05%, will you buy

Post by ASUGrad »

Johno wrote:Like a lot of such questions the assumption of many of the answers might be 'active US stock mutual fund', in which case I'd vote no. If you open it up to all assets, then my answer would change. Exhibit A would be Vanguard's own junk bond fund, VWEAX in Admiral form, .12% ER. It's actively managed. It typically invests in higher quality issues than the junk benchmarks. History tends to show that gives better return relative to risk (BB range is historically the credit rating where you get the most additional spread per unit of default loss risk, and that fund is more concentrated there than an index junk fund).
This, and the Short term investment grade admiral, ER 0.10%.

But for anything invested in stocks... no, sticking to index.
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