High-Cost Index Funds and Low-Cost Actively Managed Funds

Here’s a Vanguard Blog post called Mind fund details, not labels by Frank Kinniry that includes some good reminders about the mutual fund and ETF industry:

  • Low-cost vs. high-cost is more important than actively managed vs. passively managed.
  • Index funds can have high expense ratios.
  • Actively-managed funds can have low expense ratios.
  • You should also evaluate based on “managerial talent”, although that is much harder to judge than costs.
  • Therefore… look under the hood at the asset allocation and expense ratio!

Did you know that the average Vanguard active fund is actually cheaper than the average non-Vanguard index fund or ETF?

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A consistent history of low costs and solid, conservative management is why I have overall positive opinions of the Vanguard Wellington and Vanguard Wellesley mutual funds. If you accumulate enough assets to qualify for Admiral Shares, they only cost 0.18% and 0.15% respectively. I wouldn’t necessarily recommend them to my family as my #1 choice, but I wouldn’t tell them to switch out either. I would certainly pick Wellington/Wellesley in a 401(k) plan over a similar allocation towards expensive index funds or an expensive target retirement fund.

Bottom line. There are a lot of expensive index funds out there. Watch out.

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