Novice investors seeking to sort out the mutual funds landscape will eventually come across the debate over funds managed actively by professionals and those funds which passively mirror market indexes.
Index based-funds are generally lower in cost than their actively managed counterparts, which must take into account higher fees for fund managers and analysts. Advantages of some managed indexes are that there are a few gifted managers who achieve results do beat the market.
One of the latest reports on the state of the ongoing debate comes from Standard & Poorâ€™s Corp., which released data last week showing that itâ€™s large and small capitalization index funds outperformed the majority of actively managed funds last year.
The Standard & Poorâ€™s 500 index - which includes a broad range of companies and is used as a benchmark for funds - beat 69.1 percent of actively managed large cap funds. The S&P SmallCap 600 index beat 63.6 percent of managed smallcap funds, S&P said. However active MidCap funds beat the S&P MidCap 400 53.3 percent of the time.
Overall, the S&P 500 beat large-cap funds by over 3 percent, while the S&P SmallCap 600 beat small-cap funds by almost 2 percent. Active mid-cap funds beat the S&P MidCap 400 by 34 basis by 0.34 percent.
Taking a longer term view, for the past five years, the S&P indices have beaten more than 70 percent of actively managed funds from all three categories have failed to beat the three S&P indexes.
While the results over time may favor long term growth, such index funds are not immune from market downturns. When the dot com bubble burst in 2000, the S&P went along for the ride. However it has risen steadily since then.
For the long term investor willing to endure some turbulence and betting that the market will eventually go up, index funds may be the way to go. For those who are more adventurous, seeking to oupace the market, grabbing hold of an actively managed fund may be the more favorable choice.