Passive, index-based exchange traded funds have helped investors save billions of dollars over the years as more turned to the efficient, easily accessible, and low-cost investment tool.
According to S&P Dow Jones Indices, passive investing amidst the indexing boom over the past 25 years has helped investors save $357 billion in costs compared to actively managed strategies, Bloomberg reports.
“In the 20 years ending in 2020, 94% of all large-cap U.S. managers lagged the S&P 500,” Anu Ganti, senior director of index investment strategy, wrote in a blog post this week. “As indexing has grown, investors have benefited substantially by saving on fees and avoiding underperformance.”
The S&P Dow Jones Indices calculations might actually be a conservative estimate since it does not include data from other index providers, like major players, including MSCI Inc. and FTSE Russell.
Ganti noted that indexed assets only made up 17% of market capitalization for all their growth in 2020, which leaves the industry a lot more room for future growth at the expense of the traditional actively managed fund industry.
Index funds typically come with lower fees, or expense ratios, due to their basic passive investment methodologies based on widely observed benchmarks like the S&P 500. Consequently, these lower fees help investors save more money, especially when costs are compounded annually.
“It’s like going out to run a 5K,” Landon Loveall, a Certified Financial Planner with KB Financial Advisors, told NextAdvisor with Time. “You don’t wear a backpack with weights in it when you run a 5K. That’s what fund expenses are like — they become a weight that holds your performance back. The lower those expenses, the better off you’ll be.”
The ongoing fee war in the ETF industry has helped drive down costs, with many broad index-based ETFs showing expense ratios below 0.10%, and some even come with no cost or zero fees.
“That’s like music to the ears of an index fund investor,” Delyanne Barros, investing expert and founder of Slay the Stock Market investing course, told NextAdvisor. “We need to make sure we’re protecting our profits.”
For more market trends, visit ETF Trends.