Cash drag

Cash drag as applied to a mutual fund, is a diminution of return caused by holding a cash position. A mutual fund typically holds a cash position to facilitate redemptions and pending investments. Since underlying securities of a mutual fund, especially stocks, often have better long-term returns than cash, a permanent cash position tends to reduce the performance of the fund. Cash drag is more pronounced among actively managed funds, which typically hold higher cash reserves than index funds, which usually remain fully invested.

John Bogle, in his article, The Arithmetic of ‘All-In’ Investment Expenses, published in the Financial Analysts Journal estimates that, on average, active stock fund cash holdings reduce active fund returns by 15 basis points a year.

Data
Monthly reporting of mutual fund cash positions are posted at ICI: Trends in Mutual Fund Investing.

Annual cash balances for US equity, balanced, and bond mutual funds are provided in the table below.