Taking into account the cost basis, do managed funds actually have better returns than index funds?

Let me add my two cents' worth.

Numerous studies have shown that, yes, AT LEAST 80% of managed funds underperform the indexes after including fees and taxes over the long run. Of course, any fund can beat the index over a short period of time - and in good stock markets the indexes usually lag (but in bad times, of course, the funds lag). Strangely enough, the funds that outperform in one year (or three) tend to underperform in the next year (or three - it depends on the fund).

I'd like to add two more reasons why managed funds tend to underperform:

1) size - a $1 billion fund needs to buy huge amounts of dozens of companies just to invest all its money; a nimble private investor with just $100,000 could easily put it all down on one company and double his money in just a few months, while for a huge fund this is virtually impossible. Even if the price doubled, selling the huge position would tank the price.

2) incompetence - there are more stock funds out there than stocks! Okay, I admit that most managers are probably competent, but there are so many funds that they essentially are the market, so the average manager may have roughly the same performance as the market - but once you subtract his fees, he underperforms. Simple.

actually about 70% to 80% underperform similar index funds. There are 3 reasons. 1. expense ratio 2. tax liability of managed funds 3. herd instinct. That does not mean that there are not good managed funds and it does not mean that all index funds are good investments. Some index funds are much better than others as some managed funds are much better than others.

It depends on the fund. However, index funds are guaranteed to underpeform the index they track by whatever the underlying fund expense ratio is. Look for a managed fund that has a good track record on 3, 5, and 10 years vs. peers in the SAME asset class. So compare a large growth fund to a large growth fund so that you are comparing apples to apples. Also, be sure the manager is still with the fund. Wouldn't want to invest in a fund that had a great history only to learn the manager just left.

If you are going to buy and hold for many years, then buy andindex fund because the expenses are lower.

If you are going to trade a few times a year to take advantage of market rotation and manager style differences, then you will invariably find yourself doing better with managed funds. Fund managers with a hot hand do well for months or years, and then fall from grace.

no most funds underperform the indexes if you want to beat the indexes they have leveraged index funds that seek twice the performnce of the index go to www.proshares.com and check these leveraged funds out