By Derek Horstmeyer
Wall Street Journal
January 4, 2019 2:34 p.m. ET
I looked at all actively managed mutual funds that trade in the U.S., comparing the average return of high-fee funds (those with an expense ratio over 1.5%) with the average return of low-fee funds (all funds with expense ratios under this level). It painted a pretty negative picture of the high-fee options.
Consider the performance difference between high-fee and low-fee active funds focused on large-cap U.S. stocks. Over the past 10 years through the third quarter of 2018, the average high-fee option delivered an average annual return of 10.61% after expenses, while the low-fee option averaged 12.26%—a difference of 1.65 percentage points and a substantial advantage for the low-fee option.
An exception to the vast underperformance of high-fee mutual funds may be fixed-income mutual funds. While high-fee fixed-income funds still on average underperform their low-fee counterparts by 0.18 percentage point based on the 10-year horizon, a good number of these high-fee funds outperform the low-fee options, and they do it consistently over time.