This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Popular Index Funds Perform Poorly

Index proponents have been particularly enthusiastic about Vanguard funds, which have received huge inflows. But Vanguard's best performers have been its actively managed funds. Of the 23 Vanguard active stock funds with 10-year records, 16 have outperformed their benchmarks. In many cases, the active funds have been clearly superior to the competing Vanguard index funds. During the past decade, Vanguard Capital Opportunity (VHCOX), a large growth fund, returned 6.7% annually, while Vanguard Growth Index (VIGRX) only rose 3.7%. In the same period, Vanguard Equity Income (VEIPX), a large value fund, climbed 4.9%, while Vanguard Value Index (VIVAX) gained 3.4%.

The success of the Vanguard active funds underlines the importance of low expense ratios. Expenses are the single most powerful predictor of future returns. On average, funds with low expense ratios beat those with high expense ratios. This is true whether the funds are passive or active. In Vanguard's case, the expense ratios of the active funds are extremely low and about the same as the figures for index funds. That has made it easy for Vanguard's adept active managers to top competing passive portfolios.

A few index funds charge small fees of less than 0.15%, and the funds can be sound investments. But the average index fund has an expense ratio of 0.62%. Many top active funds have fees that are comparable to the index average. For example, Vanguard Health Care (VGHCX), an active fund, has an expense ratio of 0.36%, while iShares Dow Jones U.S. Healthcare ETF (IYH), which tracks an index, charges 0.48%. So odds are that the Vanguard fund will outdo the ETF in the future.

Index proponents remain unimpressed with the success of top active funds like Vanguard's and say there is no good way to pick active funds. As the boilerplate says, past performance does not guarantee future results. But there are sensible ways to pick active funds. Academic studies have shown that Sharpe ratios can provide some guidance. Instead of looking at only performance, the Sharpe ratio considers risk-adjusted returns, or how much return a fund delivered considering the risk that it took. The Sharpe system penalizes high-risk funds that jump around erratically and can record big losses.
2 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
GIS $62.08 0.00%
MSFT $49.94 0.00%
NKE $58.19 0.00%
STJ $75.51 0.00%
AAPL $93.24 0.00%


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs