Active vs. passive funds: the numbers don't lie
Is it worth paying 1.5% a year for returns that fail to beat the index? The evidence says no, yet the industry keeps selling active funds.
English · Original discussion in Spanish · Published
Active management doesn't beat the market, but it keeps selling smoke
Is it worth paying 1.5% a year for returns that, on top of that, don't even beat the index? The empirical evidence is damning, yet the financial industry keeps pushing active funds as if time had stood still.
The problem with fees
The first obstacle is cost. Actively managed funds charge between 1% and 2% a year, compared with 0.2% or less for an index ETF. Over the long run, that difference eats up a substantial chunk of your returns. With a 2% fee, over 30 years the investor loses more than a third of their potential capital.
But the problem isn't just the cost: most active funds don't even manage to beat the market. A look at their portfolios shows that many effectively replicate the S&P 500 or the MSCI World, but with worse results after fees. Investors are paying for an illusion of stock-picking that doesn't exist.
Alternatives that actually work
Against traditional active management, the idea of using equal-weight ETFs, such as the S&P 500 Equal Weight, has gained ground. They avoid the overexposure to tech megacaps that distorts the cap-weighted index (Nvidia, Microsoft, Google) and offer genuine diversification without high costs.
All the noise from the "value" gurus, the P/E and ROIC analysis and the Japanese candlestick charts ends up crashing against a simple fact: putting your savings in an index fund and letting time pass works better than 90% of fund managers. Even high-profile cases like Paramés — Spain's "Buffett" — have shown that past returns guarantee nothing.
Some argue that active management can make sense in very specific sectors. One investor mentions his experiment with the Water Panda Agriculture fund run by Marc Garrigasait (Gesiuris), focused on water and agriculture: since 2020 it has accumulated +30% (4.5% annualized). Not horrible, but two ETFs from other sectors have done better. And that's without counting the concentration risk.
The sarracena of the story
In the long run, passive investing wins because nobody can screw it up. With active management, someone is bound to mess up eventually. And you pay them for it. Then again, that's what management fees are for.
Is it worth paying 1.5% a year for returns that, on top of that, don't even beat the index? The empirical evidence is damning, yet the financial industry keeps pushing active funds as if time had stood still.
The problem with fees
The first obstacle is cost. Actively managed funds charge between 1% and 2% a year, compared with 0.2% or less for an index ETF. Over the long run, that difference eats up a substantial chunk of your returns. With a 2% fee, over 30 years the investor loses more than a third of their potential capital.
But the problem isn't just the cost: most active funds don't even manage to beat the market. A look at their portfolios shows that many effectively replicate the S&P 500 or the MSCI World, but with worse results after fees. Investors are paying for an illusion of stock-picking that doesn't exist.
Alternatives that actually work
Against traditional active management, the idea of using equal-weight ETFs, such as the S&P 500 Equal Weight, has gained ground. They avoid the overexposure to tech megacaps that distorts the cap-weighted index (Nvidia, Microsoft, Google) and offer genuine diversification without high costs.
All the noise from the "value" gurus, the P/E and ROIC analysis and the Japanese candlestick charts ends up crashing against a simple fact: putting your savings in an index fund and letting time pass works better than 90% of fund managers. Even high-profile cases like Paramés — Spain's "Buffett" — have shown that past returns guarantee nothing.
Some argue that active management can make sense in very specific sectors. One investor mentions his experiment with the Water Panda Agriculture fund run by Marc Garrigasait (Gesiuris), focused on water and agriculture: since 2020 it has accumulated +30% (4.5% annualized). Not horrible, but two ETFs from other sectors have done better. And that's without counting the concentration risk.
The sarracena of the story
In the long run, passive investing wins because nobody can screw it up. With active management, someone is bound to mess up eventually. And you pay them for it. Then again, that's what management fees are for.
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Summary of a discussion on Burbuja.info - Foro de economía, actualidad y política., translated from Spanish and reviewed before publication. Read the full discussion (49 replies).
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