Index Investors May Be Losing Millions of Dollars Each Year. Here’s Why.
Index funds were a step in the right direction.
Investors were fed up with the high fees and poor performance from stock-picking active managers. Decades of evidence are now suggesting that very few actively managed funds consistently beat the market. That means a rules-based investment proposition with low expense ratios and broad diversification offers an appealing alternative. But, even with index-fund investing come limitations.
A rigid implementation process that prioritizes trackability over expected returns may be costing investors hundreds of millions of dollars each year—if not more. And arbitrary construction rules for security inclusion may result in notable deviations from the market. There is a better way for investors to get market returns with low cost, while not paying extra in the hidden costs of indexing.