Similarly, Northern Trust Wealth Management found that 84 percent of actively managed domestic mutual funds, regardless of market cap, underperformed their respective benchmarks between December 2004 and December 2014.
Proponents of passive investment strategy, a concept championed by Vanguard Group founder and former CEO Jack Bogle, maintain that low-cost index funds and exchange-traded funds, or ETFs, are the better bet for investors over the long haul, since higher fees and taxable distributions negate any real return that most active fund managers eke out.
Index funds seek to replicate a market index, such as the S&P 500 or Dow Jones Industrial Average, by owning all securities in that index. They do not pay fund managers to actively select the allocation of stocks or bonds within the fund, which translates into lower fees.
The average expense ratio for all passively managed funds—including domestic, international, sector, commodities, fixed income and alternatives—is 0.91 percent, compared with 1.23 percent for the average actively managed fund, according to Morningstar.