investing

Is Your Actively Managed Fund Too Much Like an Index Fund?

A new measure can tell you whether you own a closet index fund -- and may be better off with an actual low-cost index fund.

Investors have a new tool at their disposal when it comes to determining whether they’re getting what they pay for when they invest in actively managed funds. In April, following an investigation by the New York attorney general’s office, 13 mutual fund firms, including T. Rowe Price and Vanguard, agreed to disclose to individual investors a previously unpublished measure called active share.

Active share measures the extent to which a mutual fund’s holdings deviate from a market index. An index fund would have 0% active share because its holdings completely align with those of the benchmark. In theory, the measure, when combined with expenses, allows the investor to determine how much active management he or she is paying for. If an actively managed fund holds 90% of an index, the investor may be better off with a low-cost index fund.

It’s important to remember, however, that active share has no correlation with performance, says Jeff Ptak, global head of manager research at Morningstar. Rather, before you buy a fund, try to determine whether active management is worth paying for, he says. “Investors can determine whether a fund veers from its benchmark or stays at home. If it’s the latter, then investors should begin to research how that manager adds value to the fund.”

Most Popular

Retirement: It All Starts with a Budget
personal finance

Retirement: It All Starts with a Budget

When you’re meeting with your financial planner, do you talk about your budget? If not, you should.
November 10, 2020
Planning to Sell Your Home in Retirement? Downsize Costs Along With Space
Budgeting

Planning to Sell Your Home in Retirement? Downsize Costs Along With Space

In this hot real estate market, consider the costs of buying and selling a house along with the expenses associated with your new digs.
November 13, 2020
What Biden Will Do: 24 Policy Plays to Expect From the Next Administration
Politics

What Biden Will Do: 24 Policy Plays to Expect From the Next Administration

The Kiplinger Letter forecasts President-Elect Joe Biden’s biggest priorities -- and the likelihood of progress on them.
November 19, 2020

Recommended

The Best T. Rowe Price Funds for 401(k) Retirement Savers
Kiplinger's Investing Outlook

The Best T. Rowe Price Funds for 401(k) Retirement Savers

A dozen T. Rowe Price mutual funds also have a place among the nation's most popular 401(k) retirement products. Find out which funds belong in your r…
November 27, 2020
The Best Fidelity Funds for 401(k) Retirement Savers
Investing for Income

The Best Fidelity Funds for 401(k) Retirement Savers

Fidelity funds are renowned for their managers' stock-picking prowess. We rate Fidelity's best actively managed funds that are popular in 401(k) plans…
November 27, 2020
The Best Vanguard Funds for 401(k) Retirement Savers
mutual funds

The Best Vanguard Funds for 401(k) Retirement Savers

Vanguard funds account for a third of the 100 most popular 401(k) retirement products. We rank Vanguard's best actively managed funds, including its t…
November 27, 2020
The Best American Funds for 401(k) Retirement Savers
mutual funds

The Best American Funds for 401(k) Retirement Savers

American Funds has 14 actively managed mutual funds among the 100 most popular 401(k) offerings. We look at the Best American Funds in that group, and…
November 27, 2020