Difference between revisions of "Cash drag"

From Bogleheads
Jump to navigation Jump to search
m (added reference)
(Replace HTML with widget.)
 
(6 intermediate revisions by one other user not shown)
Line 1: Line 1:
'''Cash drag''' is a diminution of return caused by a cash position in a mutual fund.  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 cash position tends to reduce the performance of the fund.
+
'''Cash drag''' as applied to a [[Mutual fund|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 [[Stock basics|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 fund|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<ref> John C. Bogle, [http://www.cfapubs.org/doi/abs/10.2469/faj.v70.n3.9 ''The Arithmetic of ‘All-In’ Investment Expenses''], Financial Analysts Journal, January/February 2014, Vol. 70, No. 1:13-21., pdf download available.</ref> estimates that, on average, active stock fund cash holdings reduce active fund returns by 15 basis points a year.<ref group="note">The Bogle cash drag estimate assumes a 5% long-term active stock fund cash holding, a 6% long-term equity premium over cash returns. This results in a 30 basis point cost. Bogle assumes that many large active funds will partially equitize  the fund's cash position through the use of stock index futures or [[Exchange-traded fund|exchange-traded funds]]. Thus, he cuts his estimate of cost by half, resulting in an estimated 15 basis point annual cost.</ref>
  
 
==Data==
 
==Data==
Line 5: Line 7:
 
Monthly reporting of mutual fund cash positions are posted at ICI: Trends in Mutual Fund Investing <ref>[http://www.ici.org/research/stats/trends/trends_09_09 ICI: Trends in Mutual Fund Investing]</ref>.
 
Monthly reporting of mutual fund cash positions are posted at ICI: Trends in Mutual Fund Investing <ref>[http://www.ici.org/research/stats/trends/trends_09_09 ICI: Trends in Mutual Fund Investing]</ref>.
  
Annual cash balances for US equity, balanced, and bond mutual funds are provided in the table below.
+
Annual cash balances for US equity, [[Balanced fund|balanced]], and [[Bond fund|bond]] mutual funds are provided in the table below.<ref>[http://www.icifactbook.org/data/17_fb_data ICI data spreadsheets]; [http://www.icifactbook.org/ ICI 2017 Fact Book]</ref>
  
<html><iframe src="https://docs.google.com/spreadsheets/d/1sSi5BQiBgB70wl2xWch0F6Hx91C_VBq3990HY37ZtaY/pubhtml?widget=true&amp;headers=false" width="1100px;" height="950px;"></iframe></html><br>[https://docs.google.com/spreadsheets/d/1sSi5BQiBgB70wl2xWch0F6Hx91C_VBq3990HY37ZtaY/edit#gid=0 google drive spreadsheet] <ref>[http://www.icifactbook.org/fb_data.html ICI data spreadsheets]; [http://www.ici.org/research/stats/factbook ICI 2015 Fact Book]</ref>
+
{{#widget:Google Spreadsheet
 +
|key=1sSi5BQiBgB70wl2xWch0F6Hx91C_VBq3990HY37ZtaY
 +
|width=1100px
 +
|height=950px
 +
}} <br> {{spreadsheet|key=1sSi5BQiBgB70wl2xWch0F6Hx91C_VBq3990HY37ZtaY}}
  
 +
==Notes==
 +
<references group="note"/>
  
 
==References==
 
==References==
 
{{Reflist}}
 
{{Reflist}}
  
[[Category:Development]]
+
[[Category: Mutual funds]]

Latest revision as of 14:11, 25 December 2020

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[1] estimates that, on average, active stock fund cash holdings reduce active fund returns by 15 basis points a year.[note 1]

Data

Monthly reporting of mutual fund cash positions are posted at ICI: Trends in Mutual Fund Investing [2].

Annual cash balances for US equity, balanced, and bond mutual funds are provided in the table below.[3]


(View Google Spreadsheet in browser, then File --> Download as to download the file.)
Note: If the spreadsheet is blank, select a different sheet, then back to that sheet. The image will be refreshed.


Notes

  1. The Bogle cash drag estimate assumes a 5% long-term active stock fund cash holding, a 6% long-term equity premium over cash returns. This results in a 30 basis point cost. Bogle assumes that many large active funds will partially equitize the fund's cash position through the use of stock index futures or exchange-traded funds. Thus, he cuts his estimate of cost by half, resulting in an estimated 15 basis point annual cost.

References

  1. John C. Bogle, The Arithmetic of ‘All-In’ Investment Expenses, Financial Analysts Journal, January/February 2014, Vol. 70, No. 1:13-21., pdf download available.
  2. ICI: Trends in Mutual Fund Investing
  3. ICI data spreadsheets; ICI 2017 Fact Book