Actively Managed Mutual Funds Are Getting Cheaper

Here are five that are worth the money, according to experts.

- Sergei Klebnikov

FOR YEARS INVESTORS have been passing over actively managed mutual funds in favor of cheaper index-tracking options. Now active funds are themselves getting cheaper, and some market pros think they’re worth investors’ attention.

Over the past decade, index funds—which aim to match rather than beat stock market returns—have been gaining fans, collecting tens of billions in new investment dollars. MONEY typically recommends index funds as core holdings for most investors but recognizes that many readers prefer trying to beat the market with at least part of their portfolios.

Costs matter for investment returns. Every percentage point in annual fees that investors pay to asset managers gets subtracted from investors’ annual returns. In other words, if the stock market rose 10% in a given year, an actively managed fund with a 1% expense ratio—once a common industry standard—would need to return 11% just to match the return of an index fund. (In actuality, index funds’ returns are also reduced by their own expense ratios, although these are typically much smaller.) Historically, only a small handful of actively managed funds clear this hurdle, outperforming the market by more than the amount of their fees.