Individuals and even large institutions pay too much for their U.S. stock market exposure. The U.S. stock market is one of the most efficient markets in the world. It generally doesn’t makes sense to use actively managed U.S. equity funds. This is the first of three posts we are writing on the perils of active management in U.S. equities.
- Over $3.6 trillion of assets are invested in active U.S. Equity Funds according to Morningstar
- 83% of active U.S. Equity Funds underperformed the index over the last 10 years (this even excludes a huge survivorship bias)
- 0.80% is the average fee for an active U.S. Equity Fund (this does not include loads and 12b-1 fees)
- 0.05% is the fee of a Vanguard U.S. Equity Fund (which outperformed over 80% of the active funds the last 10 years, also available as an ETF)
RUNNING THE NUMBERS:
Dollars spent on underperforming U.S. Equity Strategies = $22.4 billion / year
=($3.6 trillion in active U.S. Equity Funds)*(83% of active U.S. Equity Funds underperform the index) *(0.80% – 0.05% fee difference between active and passive management)
=$22.4 billion / year in fees on loosing actively managed U.S. equity strategies
Don’t waste time and money trying to beat the most efficient stock market in the world. Allocate your active management budget to markets that are not as efficient as U.S. Equities. For example, Emerging Markets or Global Government Debt are generally less efficient markets. Be passive in the U.S. Equity market and buy a low cost ETF.