Assume a typical index fund or ETF charges a management fee of 0.10% per year an

Question

Assume a typical index fund or ETF charges a management fee of 0.10% per year and has low turnover resulting in trading costs of another 0.05% per year. Assume that an actively managed stock mutual fund charges a management fee of 1.0% and has much higher turnover resulting in trading costs of an additional 0.5% per year. The actively managed fund has a chance to outperform the market while the index fund will deliver the return of the market (less management and trading costs). What excess return per year must the actively managed fund earn to overcome the higher fees?

Explanation / Answer

Excess return per year must the actively managed fund earn to overcome the higher fees = ( Management Fee + trading costs ) in actively managed stock mutual fund - ( Management Fee + trading costs ) in typical index fund or ETF

Excess return per year must the actively managed fund earn to overcome the higher fees = (1%+0.5%)-(0.1%+0.05%)

Excess return per year must the actively managed fund earn to overcome the higher fees = 1.35%

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