As investors pile into index-based funds to chase lower fees, one fund research group is sharing its view on what that choice means for investors over time, and the results should surprise both advisors and their clients.
In the longer term, Dalbar says, active investments have produced better results, which reflects investors' tendency to stay in these funds for longer periods of time.
Over short-term horizons, though, passive investments do better—such as when they are driven by run-ups in the market following election results and other factors.
In looking at how and why active investments post superior investment statistics to passive funds, the Dalbar team points to stronger investor retention during market downturns, asset allocation and capital preservation strategies of active investments as being advantageous.
"The accolades for passive investments have been deaf to best interests of investors," said Dalbar CEO Lou Harvey. "We uncovered 12 important factors beyond expenses that should be considered."
Dalbar's report concludes that investors and advisors should choose active or passive funds by looking closely at investors' "needs and preferences," as well as examining carefully the associated costs of asset allocation and capital preservation strategies not available in passive funds.
Time Trap
The annualized performance difference for active funds vs. passive funds over the 15-year period ending Dec. 31 is 1.2%, according to Dalbar research.
