Active Fund Managers' Trading Costs Investors Nearly a Point Yearly

Full analysis

A Morningstar analysis by Jeff Ptak of the 100 largest active U.S. stock funds found that the funds, taken together, underperformed — not because their stock picks were bad, but because the trading managers did after the initial purchases destroyed value. A hypothetical "do-nothing" portfolio that simply froze the funds' actual holdings and made no further trades beat the real funds in nine of the ten years studied, returning 14.3% annually versus the actual funds' return that trailed by nearly a percentage point. An even more extreme test — freezing the collective holdings at the end of 2015 and leaving them untouched for a decade — produced a 15.2% annual return, beating both the actual funds (13.8%) and the index itself (14.9%).

The findings align with a 2021 academic study that found institutional investors are skilled at buying but poor at selling, likely because they devote less mental attention to exit decisions than entry ones. Separate research by Eugene Fama and Ken French found that only about 2% of actively managed funds outperform on a statistically significant basis — less than chance would predict. The practical implication for anyone holding actively managed funds in a retirement account or taxable portfolio: every trade a manager makes generates costs, potential taxes, and behavioral errors that compound against you over time. Larry Swedroe, writing in WealthManagement.com, concludes that index funds' edge is not only lower fees but also the discipline of not trading.