Do actively managed funds perform better than index funds? A test in the Canadian market

Abstract

Actuality of the study: Mutual funds are a favourite investment product among many investors. They provide a simple means of diversification, especially for those with smaller amounts of capital, and the popularity of mutual funds has increased with the success of the marketing efforts behind them.Purpose: This study evaluates the performance of actively managed and index mutual funds within the Canadian equities market.Findings: As index investing has increased in popularity, and other markets have become more connected and open, there is a need for research on equity mutual funds in countries outside the US.Originality / Value: The majority of previous research on index funds and actively managed mutual funds is focused on the US market and related indexes such as the S&P 500.Practical implications: This study suggests that, on average, active funds in Canada fail to beat their benchmarks net (but not gross) of the common fee or management expense ratio. Surprisingly, this research finds no positive relationship between higher fees and better gross performance. Actively managed funds also have poorer performance over the long term. This study finds that investors would be better off purchasing low cost index funds as they provide a more secure return.Future research: This study endorses research on other markets with inclusion of additional variables in order to explain gross performance and secure returns.