A new look at the costs of actively managed mutual funds is the subject of an article written by John Bogle, the founder of the Vanguard Group, in the forthcoming Financial Analysts Journal. The article takes a fresh look at what Bogle calls the “All-In” investment expenses of actively managed mutual funds and their impact on fund performance versus low-cost index funds. Previous work in this area has focused primarily on the differences in published expense ratios1. In the article, Bogle estimates the impact of additional, unpublished costs borne by fund investors. The additional costs include internal transaction costs (0.50%), cash drag (0.15%), sales charges/fees (0.50%) and, for taxable accounts, excess taxable events (0.45%).
Although one can quibble over the individual estimates Bogle places on each of these additional expenses, in aggregate, it is clear that published expense ratios do not fully reflect the true difference in costs borne by investors in actively managed funds compared to index funds.
1 Bogle assumes a 1.06% difference in expense ratios between actively managed and index funds by taking William F. Sharpe’s (2013) estimate based on the difference between the average large-cap blend fund of 1.12% and the Vanguard Total Stock Market Index Fund of 0.06%.