Active Funds vs. Index Funds: Best Funds Since 1999

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Let’s flash back 15 years ago, to 1999. Tech stocks were all the rage, and companies were adding “dot com” to their company names to attract investors. (And it actually worked.) Bill Clinton was President, Friends was the hit TV show, Cher’s “Believe” was the biggest radio song, and “Y2K” fears were rising.

best index funds

But who was thinking about investing in index funds in 1999? Not too many, as evidenced by the massive growth of assets in the popular late-90’s actively managed fund shops, such as Janus Capital Group Inc (JNS).

The greatest strength of index funds is their ability to accomplish superior long-term performance, which is a direct result of their extremely low expense ratios. Over time, the higher expenses of the typical actively-managed fund becomes a drag on performance, which makes the manager’s job of “beating the market” increasingly difficult, unless they do an outstanding job of navigating the changing market and economic conditions.

So I thought it would be interesting to take a look at the numbers and go back 15 years to find the best-performing index funds since then and also see how actively-managed funds have held up compared to their passively-managed contemporaries.

Here are the best index funds, as measured by 15-year annualized returns, since 1999. We’ll even break it down to a large-cap fund, mid-cap fund, small-cap fund, and sector fund.

Best Large-Cap Index Fund Since 1999: Vanguard Value Index (VIVAX)

best index fundsIn 1999, the lion’s share of media and investor attention was given to the hottest actively managed large-cap growth stock funds, such as Janus Mercury (JAMRX), that skyrocketed 96% that year. By comparison, how many investors would have been satisfied in 1999 by the 20% gain on the S&P 500 Index?

The 15-year annualized return for Janus Mercury, which wisely changed its name to Janus Research T, is 4.2%. But if an investor were able to ignore the aggressive growth hype of the late-90’s and instead bought shares of Vanguard Value Index (VIVAX), they would have earned 5.7% since 1999.

For reference, the S&P 500 has an annualized 15-year return of 4.7%. Indexing wins round one!

Best Mid-cap Index Fund Since 1999: Vanguard Mid Cap Index (VIMSX)

best index fundsMid-cap stocks have enjoyed some of the highest returns among any fund category since 1999, and Vanguard Mid Cap Index (VIMSX) is the best of the index funds in the group.

It’s 15-year annualized return of 10.1% places Vanguard Mid Cap Index ahead of more than 80% of funds in its mid-cap blend category, which includes both index funds and actively-managed funds.

The average mid-cap blend fund has an expense ratio of 1.27%, while VIMSX expenses of just 0.24%. This is better than 1% advantage and is more evidence that cheaper, passively-managed funds do better over time.

Best Small-cap Index Fund Since 1999: Vanguard Small Cap Value Index (VISVX)

best index fundsAre we beginning to see a trend here? Vanguard is a premier indexing company because its index funds generally have the lowest expense ratios. And Vanguard Small Cap Value Index (VISVX) continues the trend of outperformance.

The expense ratio of 0.24% for VISVX is again more than a full percentage point lower than the 1.32% average for the small blend category of mutual funds. The cheap cost also contributes to its 15-year annualized return of 10.4%.

However, check out this trend buster: Even with the higher relative expense ratio, the average 15-year return for the small blend category is 10.7%, which means that index funds lose to actively-managed funds in small cap stocks. The primary reason is that small-cap stocks are not as “efficient” as larger-cap stocks, meaning that managers can add value by doing the needed research and skillful stock selection to pick the best performers.

Best Sector Index Fund Since 1999: Vanguard REIT Index (VGSIX)

best index fundsVanguard REIT Index (VGSIX) gets the prize for best sector index fund since 1999. With an outstanding 15-year annualized return of 11.5%, VGSIX also wins for the best return among all of the index funds in our list and all of the funds I researched for this project.

However, this performance win comes with a significant asterisk next to it: Indexing for sectors did not really grow in popularity until the past 10 years, especially with the explosion of ETFs in more recent years.

The best performing sector overall since 1999, including both index and actively-managed funds, is the energy sector. But there are no true index funds dating back to 1999. However, Vanguard still demonstrates that low expenses matter in the long run with it Vanguard Energy (VGELX), which put in an incredible 15-year annualized return of 12.8%, which beats nearly 80% of its category peers.

The next 15 years will likely look a bit different, now that Vanguard has much more competition in the index funds arena. However, there is no doubt that low expenses will play a tremendous role in performance just as much in the next decade and a half as it did in the last.

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/best-index-funds-vs-active-funds/.

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