By Cavanaugh Asset Management

Typically, expense ratios for actively-managed mutual funds range from about 0.75% to 2.5%. Index fund expenses usually depend on the index they track. Many large cap index funds have expenses less than 0.20%, while small cap, international, and sector specific index funds are often closer to 0.60%. CCM's index fund product has an expense ratio of 0.22% assuming a typical portfolio structure.

The expense ratio is effectively the price one pays to be invested in a mutual fund. All else being equal, when the fund charges more, investors keep less. For example, an investment of $100,000 in a portfolio of index funds (with an expense ratio of 0.22%) returning 10% annually, would be worth $253,724 after ten years. The same investment and the same returns for an actively-managed mutual fund (with expenses of 1.53%) would be worth $222,314, or $31,410 less. That is a cumulative difference of 14%. The concept of efficient markets suggests that active investment management will perform about the same as a passive portfolio. Since expenses are less with index funds, the passive approach will tend to outperform the majority of actively-managed funds.

04/04/2001

This article is the property of Cavanaugh Asset Management, and is reprinted with permission. Cavanaugh Capital Management's mission is to provide equity clients with a diversified portfolio of index funds while also providing professional monitoring and reporting.