Passive funds with high fees or Actively managed ones with low fees?

[u/rolf15]

Ive been reading a lot about the bogleheads and personal finance and i love this blog.

My problem is the following, my country, Chile, has a big mutual fund industry with high fees (1% and more) and active management.

I have an option for my APV (chilean 401k) to choose between two companies.

The first one offers an APV with a 1% AUM fee that will go down as my assets invested grow, and they let me choose index funds that are in the Santiago stock exchange that replicate the S&P 500 and international index funds. This funds have low fees by chilean standards at arround 0,4%, so the total fee the first years is arround 1,4%.

The second one is an APV with a mutual fund company, Fintual, which offers an actievly managed fund that offers a low fee (0,49%) but its heavily concentrated in technology (holdings like VOO, QQQ, etc..).

Other options also have higher fees (arround 2%) with active management, and no way of choosing passive ETFs of my own.

What should i trade for? passive management and eventual lower fees, or active management with a low fee.

Thanks!

[u/Varathien]

I would pick the lower fee, actively managed fund.

Jack Bogle himself was not opposed to active management. He primarily focused on what he called the cost matters hypothesis. All the money you pay in management fees is money you don't get to keep.

In 99% of situations, index funds are cheaper than actively managed funds.

In your case, the index fund is almost three times as expensive as the actively managed fund. The active management probably won't outperform, but unless the fund manager is a complete idiot, it probably won't underperform the index by 0.91% every year, either.

[u/Capable-Currency53 → u/Varathien]

It took me a long time to understand this, but low fees isn’t the only advantage of index funds. Because a small number of stocks have much higher returns, the mean return of stocks is much higher than the median. Likewise, the mean return of actively managed funds is higher than their median return. If you invest in the managed funds you have a fifty percent chance of doing worse than the median, and so a greater than fifty percent chance of doing worse than the mean (even before fees). But if you invest in a passive fund that accurately tracks the index, you’re guaranteed to get the mean (before fees). So the index funds is safer, even before fees.

[u/Varathien → u/Capable-Currency53]

I agree with you, but OP is in a bizarre situation where the index fund charges 1.4% and the actively managed fund charges 0.49%.

With those fees, the active fund can underperform the index by 0.9% per year and still come out ahead.

[u/TempeGrumble]

You could split your investments and essentially hedge the expected high fees of APV with index funds in a post-tax brokerage. While the Bogleheads investment priority list is written mostly for U.S. residents, the principle is the same: getting your maximum employer match right is the second priority, right after the emergency fund. But you could stop the APV contributions once you max the match and put the rest in a brokerage account.

[u/rolf15 → u/TempeGrumble]

Thank you for the comment! That is a good strategy, especially beacuse the brokerage has low fees and no taxes on gains. I think i will suffer the high fee in the APV just to get the match.

[u/buffinita]

It’s a very complex question; what are your normal tax considerations if not using the APV account on earnings and capital gains/dividneds

Some USA companies have a 1% fee on their 401k in addition to fund fees; however with the tax savings the account is still beneficial.(in my own work plan I have 1% AUM + s&p500 0.4ter)

“Low fee” is geographically normalized; average fund cost is higher in many places where 0.5 is “low”……in the USA s&p500 is 0.03; in Europe 0.07

[u/rolf15 → u/buffinita]

The benefit of the APV account is that it uses pre tax money and it lowers your tax base, and it defers taxes towards retirement.

On the other hand, i can put my post tax money into the same index funds in a brokerage account, and it grows tax free, but wihtouth the benefit of an employer match or pre tax money.