Index Funds Still Tops in Performance
As shocking as it may seem, in August 2010 Morningstar published a study showing that mutual fund expense ratios
are more predictive of performance than its star ratings. In its study, one-star funds that had lower expense ratios
typically beat five star funds that had higher expense ratios. It is quite an admission for a company that built its
business and reputation on its star ratings.
We are not surprised. Fees matter. We have liked index funds for a long time because of their low fees, and in the
long run, those low fees lead to outperforming more expensive alternatives.
We believe that over time a structured investment approach based on the efficacy of capital markets will add value
with a higher reliability and confidence level than one based on instinct and trying to guess the direction of the
markets. We use index funds because we agree with their philosophy of adhering strictly to specific parameters to
maintain reliable asset class exposures. Their portfolio managers have no discretion to purchase stocks that do not
meet these parameters, and no financial incentive exists for them to deviate from their very specific disciplines.
Because index funds focus on capturing the systematic performance of broad market dimensions rather than the
random fluctuations of individual securities, they can keep costs low, patiently and expertly. They concentrate on
favorable price execution that neutralizes the effects of momentum and index reconstitution and they maintain portfolio-
specific hold ranges that reduce turnover and trading costs.
In line with their structured, scientific approach to investing, index funds’ investment management fees are positioned
well below those of typical, traditional active managers. Their patient and price-conscious buy-and-hold approach to
trading is designed to minimize costs, and according to Morningstar, it rewards their investors.
©2006-2012 Yardley Wealth Management, LLC. All rights reserved.
As shocking as it may seem, in August 2010 Morningstar published a study showing that mutual fund expense ratios
are more predictive of performance than its star ratings. In its study, one-star funds that had lower expense ratios
typically beat five star funds that had higher expense ratios. It is quite an admission for a company that built its
business and reputation on its star ratings.
We are not surprised. Fees matter. We have liked index funds for a long time because of their low fees, and in the
long run, those low fees lead to outperforming more expensive alternatives.
We believe that over time a structured investment approach based on the efficacy of capital markets will add value
with a higher reliability and confidence level than one based on instinct and trying to guess the direction of the
markets. We use index funds because we agree with their philosophy of adhering strictly to specific parameters to
maintain reliable asset class exposures. Their portfolio managers have no discretion to purchase stocks that do not
meet these parameters, and no financial incentive exists for them to deviate from their very specific disciplines.
Because index funds focus on capturing the systematic performance of broad market dimensions rather than the
random fluctuations of individual securities, they can keep costs low, patiently and expertly. They concentrate on
favorable price execution that neutralizes the effects of momentum and index reconstitution and they maintain portfolio-
specific hold ranges that reduce turnover and trading costs.
In line with their structured, scientific approach to investing, index funds’ investment management fees are positioned
well below those of typical, traditional active managers. Their patient and price-conscious buy-and-hold approach to
trading is designed to minimize costs, and according to Morningstar, it rewards their investors.
©2006-2012 Yardley Wealth Management, LLC. All rights reserved.
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Michael J. Garry, CFP®, JD/MBA, owner of Yardley Wealth Management, LLC,
is an independent Financial Advisor who provides Fee-Only financial planning
services and investment management in Newtown, PA.
is an independent Financial Advisor who provides Fee-Only financial planning
services and investment management in Newtown, PA.
| Address: 41 University Drive Suite 400, Newtown, PA 18940 Phone: 267-573-1019 Toll free: 877-251-4393 Fax: 267-604-9164 mgarry@yardleywealth.net |