Should you try and beat the market by buying an actively managed fund, or should you just buy theFTSE 100andFTSE 250?
This is a question thats been facing investors for some time, and has been labelled as the great debate by some analysts.
To solve the question, Jack Bogle an index fund pioneer and founder of Vanguard recently set out to prove that indexing is the best way to go for most investors with a series of charts.
Bogles figures
Bogles figures revealed that, thanks to fees and charges alone, the average actively managed US equity fund will underperform a standard, low-cost tracker fund by 2.64% per annum.
Now, an extra 2.64% per annum might not seem like much, but the additional returns really stack up.
Indeed, Bogles figures showed that over 50 years a $10,000 investment compounded at 6.64% per annum the standard tracker return would turn into $248,000. However, $10,000 compounded at just under 4% for 50 years a return including active management fees would turn into $70,387.
That means that due to excessive management charges, investors who put their money to work in actively managed funds would have lost out on $177,610 worth of gains over the period studied.
Slow and steady
Other research also supports the argument for indexing.
Over the past 29 years, the FTSE 100 has returned around 5.5% per annum, excluding dividends. Meanwhile, the FTSE 250 has outperformed its blue-chip peer by around 90% excluding dividends. And finally, the FTSE All-Share has returned closer to 6% per annum. Including dividends these returns would be closer to 10%.
On the other hand, according toresearch conducted by a number of financial institutions, the average private investor has only returned 2.5% per annum including dividends.
Whats more, with an estimated 80% of active fund managers failing to beat the market, its easy to conclude that tracker funds are the best way to go.
Low-cost
There are some very low-cost trackers out there for you to take advantage of. For example,theBlackRock 100 UK Equity Tracker,Fidelity Index UKanddb x-trackers FTSE 100 UCITS ETF(LSE: XUKX) all charge a lowly 0.09% per annum in management fees.
For the FTSE 250, theiShares FTSE 250 UCITS ETFcharges an annual management fee of 0.4% and theHSBC FTSE 250 Indexfund charges around 0.3% per annum.
Low-cost FTSE All-Share trackers include the Vanguard FTSE UK Equity Index, whichcharges 0.08%,Fidelity Index UKwhich offers index replication for 0.09% (0.07% if purchased through Fidelity) and theLegal & General Tracker Trustcharges 0.10%.
The income problem
Unfortunately, while index trackers may be a low-risk, low-cost way to grow your wealth over time, income investors are likely to be disappointed.
Indeed, the HSBC FTSE 250 tracker only offers a dividend yield of 2.2% and the BlackRock 100 UK Equity Trackers dividend yield stands at 2.6%.
So, if you rely on your investments for additional income, then it could be sensible to buy a selection of dividend champions to sit in your portfolio alongside a low-cost tracker.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.