The Lamest Argument Against Index Funds

by Jason Unger

I totally get why some in the financial media hate writing about index funds: they’re easy to explain, there’s no amazing fund manager behind them, and the story generally stays the same over time.

In essence, there’s only so much to say about index funds. They work. You can’t over-analyze and constantly produce content about them, like you can when stock picking.

But this latest argument is just lame. And incredibly lazy.

Courtesy of The Street (specifically Stan Luxenberg): Index Funds Aren’t Always the Best Choice

Consider the Vanguard 500 Index Fund (VFINX), the oldest S&P 500 fund, which has declined 0.6% annually during the past 10 years and lagged 56% of large blend funds. Investors would have been better off owning the Franklin Rising Dividend Fund(FRDPX), an active large blend fund that returned 6.5% annually during the decade.

Wait, so your argument is that a mutual fund performed better than an index fund?

Really? Come on.

Of course there are actively managed funds that out-performed comparable index funds. The whole point of an index fund is not to beat the index, but to replicate it as closely as possible, with the lowest fees and lowest turnover possible.

But Stan, for real. You’re going to base an entire argument against index funds by showing one mutual fund that did well over the past 10 years?

Well, Stan goes on to show a few different index funds in different sectors (foreign and emerging markets, for example), but the point remains the same: hindsight is always 20/20, and you’ll never be able to accurately find the actively managed fund that beats the index, consistently, after fees and charges.

It just won’t happen. (You’ve got like a 3% chance).

This is a lame argument; in fact, it’s the lamest argument I’ve ever seen against index funds.

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