19.) We help clients optimize investment portfolios with passive investing strategies that match selected indices and suballocations, seeking better long-term returns than actively managed funds with less volatility.
Actively managed equity and fixed income funds charge high fees and high expense ratios for the perceived value they provide over passively managed index funds. But in reality, these additional fees and costs usually do not translate into better returns for the purchaser of these actively managed funds.
For example, according to the SPIVA U.S. Scorecard, in 2024, 65% of all active large-cap U.S. equity funds underperformed the S&P 500. That means 65 out of 100 active large cap U.S. equity funds, which are charging a premium for their active management services, performed worse than the S&P 500 index benchmark. If a client had simply purchased a passive S&P 500 index fund, which is designed to track the S&P 500 Index as closely as possible, their passive fund would have increased in value more than nearly two-thirds of the professionally managed U.S. equity funds.
But one year isn’t enough of a time horizon to really determine which strategy is best. Maybe 2024 was just a unique, bad or unlucky year and next year the actively managed funds will beat the passively managed funds.
Well, it isn’t just the one year: the more years you include in your data set and the longer the time-horizon for your comparison – the worse the actively managed funds do versus the analogous benchmark:
“Across asset classes, underperformance rates typically rose as time horizons lengthened. At the one-year horizon, 7 of 22 equity categories and 11 of 16 fixed income categories saw majority outperformance. Over the 15-year period ending December 2024, there were no categories in which a majority of active managers outperformed.”
(SPIVA U.S. Scorecard). And even if the actively managed fund happened to be one of the few that beat the index in a given year, it is unlikely it will continue to be the outlier and beat the index in future and subsequent years.
Using passive investment strategies and buying passively managed mutual funds and exchange trade funds that track an index often leads to better returns and lower expense ratios, especially in the long run.
The same trend seen for these U.S. equity funds holds true for international equity funds and fixed-income funds as well.
For the full SPIVA U.S. Scorecard report, tables and to read more, you can go to: https://www.spglobal.com/spdji/en/spiva/article/spiva-us/
I encourage you to explore and read S&P Global’s most recent SPIVA U.S. Year-End 2024 report, which can currently be downloaded at:
https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2024.pdf
Please contact us at: Contact Arrivity or 206.217.2583 or info@arrivity.com if we can assist you or someone you know with financial planning.
Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.