Bashing index funds is a popular theme, but do the criticisms have value?
There are reasons to prefer index funds (now 18% of funds):
- Supported by academic research.
- Supported by history.
- Most active managers don’t beat the index.
- Index funds have tax advantages and lower fees.
A well-meaning blogger touts the CGM Focus Fund as being spectacularly better than the S&P 500. Let’s give him credit for courage, and then demolish his ideas.
Let’s look at what the CGMFX Prospectus has to say:
- The initial head-to-head comparison:
CGMFX 10 year return before taxes – 7.37%
S&P 500 10 year return before taxes – 7.67%
–According to CGM, CGMFX is not quite as good as the dull-and-boring-but-makes-more-money S&P 500 which is faithfully followed by a number of index funds (for example VFINX, SWPPX, and FUSEX).
- If I wished to be unkind I could note:
CGMFX Yearly Operating Expenses: 2.26%
VFINX Yearly Operating Expenses: .17%
VFINX Admiral shares: .05%
–This gives CGMFX, 5.11%/year vs. VFINX 7.5% or 7.62%.
–I.E. The S&P 500 Index Fund returned 146% or 149% of what CGMFX did.
- Just for good measure, keep in mind:
If your investment isn’t in an untaxed vehicle (401k, IRA) then your profits are subject to the tax man. One important number is “turnover”, the % of the investment bought and sold within the year. Things sold in less than a year are at the higher short term rate. Index funds are pretty tax efficient, because they buy and hold (VFINX often has 3-4% turnover), but the average active fund has a much higher “turnover ratio” of 130% (e.g. 100% means on average everything the fund owned was bought and sold every year). turnover for CGMFX was a colossal 266% for 2014. If you do make a little money…you’ll be sharing it with the tax man.
Horse laugh time
