Question

Which of the following might explain why investors might expect to receive a higher return in the long run from buying index funds rather than actively managed funds?

a) Lower fees
b) Higher risk
c) Tax advantages
d) Market volatility

Answer 1

Investors often achieve higher returns from index funds compared to actively managed funds due to lower fees and the tendency of index funds to match market performance over time.

Step-by-step explanation:

Investors might expect to receive a higher return in the long run from buying index funds rather than actively managed funds primarily due to lower fees. Index funds generally have lower management expenses because they are designed to follow the performance of a market index and do not require the same level of active decision-making as managed funds. This cost-saving is passed on to investors. Additionally, index funds often match market performance which, over time, tends to be favorable compared to actively managed funds where managers attempt to outperform the market but often do not, especially after accounting for higher transaction fees and management costs.