Why try to beat the stock market? More mutual fund investors are saying it's not worth the extra cost. Instead, they're piling into funds that aim to match a stock index's performance.
Last month, the most popular mutual fund was Vanguard's Total Stock Market Index fund, which took in a net $2.3 billion, according to Morningstar. It tries to mimic a broad U.S. market index that includes everything from tiny stocks to giants like Apple, and it has an expense ratio of 0.17 percent. A fund's expense ratio shows how much of its assets are used to pay managers' salaries and other costs annually. Domestic stock funds have an average expense ratio of 1.26 percent.
Not only do funds that are run by stock pickers carry higher expenses, many also fail to beat their respective index. After looking at the performance of all large-cap stock mutual funds over the 12 months through June 30, S&P Dow Jones Indices says that three out of five, some 60 percent, failed to match the 20.6 percent return for the Standard & Poor's 500 index, including dividends.
The trend is even more pronounced for funds focused on small and medium-sized stocks. More than two-thirds of all mid-cap stock funds, 69 percent, fell short of the 25.2 percent return for the S&P 400 index, and 64 percent of all small-cap funds had a weaker performance than the 25.2 return for the S&P 600 index.
Those numbers are actually better than in recent years. Over the last five years, 79 percent of all large-cap stock funds, 82 percent of all mid-cap funds and 78 percent of all small-cap funds failed to match their respective index.