(June 2012) “You get what you pay for!”
Does this expression hold true for bond mutual fund fees? Do higher fees really lead to better investment performance? As a category, mutual funds that are actively managed have higher fees than passively managed mutual funds. Actively managed funds involve a portfolio manager making investment decisions with the goal of beating a market index. On other other hand, a passively managed mutual fund tries to track a market index by mirroring the holdings in the index.
According to Morningstar, the average actively managed bond mutual fund has an average annual expense ratio of 1.01%. They also show that the average annual expense ratio for passively managed bond mutual funds is only 0.37%.
After fees (excluding sales load which are avoidable), which has a better performance: Actively or Passively Managed Funds (all funds, including stock funds)? Answer: There is no clear winner. Over 5 and 10 year periods, actively managed funds slightly outperform passively managed funds. However, over the last three years, passively managed funds have done almost 2.0% better than actively managed funds.
Time Frame Last (as of May 31st, 2012)
Actively Managed Mutual Funds Performance Passively Managed Mutual Fund Performance Difference 3 Years 11.07% 12.82% 1.75% 5 Years 0.55% – 0.56% 1.11% 10 Years 5.28% 4.87% 0.41% When you drill down into bond funds the differences are even smaller, although, actively managed bond fund do slightly outperform passively managed bond mutual funds over 3 and 10 year time horizons. Over a 10 year time horizon, the performance difference is a a microscopic 0.03%. In other words, again we have tie.
The numbers below are for taxable bond funds, which exclude municipal bond funds but include Treasury bond funds. Time Frame Last (as of May 31st, 2012) Actively Managed Taxable Bond Fund Performance Passively Managed Taxable Bond Fund …
