True or False? An index can be used to see how well money managers are earning their keep.
Correct Answer: True
Mutual funds, for instance, are pools of investors' money that are actively managed to profit from investments, and the managers charge a fee (sometimes a pretty hefty fee) for their services. But how well are they doing? If a stock fund isn't doing better than the S&P 500, then someone, even without any investment experience, using a naïve buy-and-hold strategy, could simply buy all of the stocks that compose that index, mirroring the same weight as the index, or an equivalent exchange-traded fund, and do better than the fund managers with all of their knowledge and the resources that they have available. If the money manager can't do better than an index, the money manager has no real value, and fees should be minimal. In fact, it is because very few managers beat the indices that index funds and exchange-traded funds have become so popular. By doing away with active management and the associated fees, these funds charge the lowest fees, and therefore, generally yield the highest returns (because high fees subtract from the returns that investors can earn from a fund).
