Expense Ratios, and Opportunity Costs: Redefining Cost
One of the main arguments of the passive investor is to say that the expense ratio of an actively managed mutual fund, on average, is too high to beat an index or smart beta fund after fees and expenses. Within the closed loop world of academia where all investments return the same amount, this is clearly true. However, in the real world, managers that produce alpha through a disciplined, principled, systematic process, are more than worth the expense. Rarely do academics explore the true cost of index investing, which can be considerable.
Let us explore one key example of the IShares MSCI EAFE Index (EFA), IShares MSCI EAFE Value Index (EFV) and DFA International Value, (DFVIX) all vs. The Tweedy Browne Global Value fund, (TBGVX). Over the past 20 years, TBGVX, has produced far more alpha, on both an absolute and risk…