With index funds and exchange traded funds (ETFs) so much cheaper than actively managed funds, why would anyone still choose an actively managed mutual fund?

Many ETF expense ratios are 0.2% or less per year while actively managed funds charge at least double of that. Walter Updegrave for Money Magazine says that there is no guarantee which fund will perform better, but when fees and expenses are taken into consideration, funds with the lower fees usually generate higher returns.

There are several reasons why following an index is a better alternative to actively managed funds. By investing in indexes, investors know what and where their investments are at any time. That’s called transparency. In addition, the tax efficiency of ETFs is unparalleled because they generally don’t have to pay as much in taxes for capital gain distributions as mutual funds. Whether it is an index fund or an actively managed fund, look at your portfolio, think about your financial goals and make sure you know what you are buying.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.