The Costs of Active Management
Skills, expenses, and taxes.
Sources of Pain
It's common knowledge that actively run stock funds tend to lag index funds.
But why? One possibility is that active managers collectively make poor investment choices. Another is that their investment decisions are satisfactory but are undermined by trading costs. Yet another is that active funds overcome the burden of their trading costs but not that of their official expense ratios (which do not include trading costs). Finally, there is the issue of taxes. How much damage, if any, does active management cause with taxes?
John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.