Frequent readers of this blog know I'm a passionate supporter of passive investing. However, simply choosing passive investments isn't enough for investing success. You need to look under the hood, at the fund's expense ratio and how it can add value beyond just tracking an index.
Today my colleague Kevin Grogan, my co-author on The Only Guide You'll Ever Need for the Right Financial Plan, takes a look at the passively managed funds offered by Northern Trust. The three passive funds that have 10 years of history are:
- The Northern Institutional International Equity Index (BIEIX) -- 0.41 percent expense ratio
- The Northern Stock Index (NOSIX) -- 0.25 percent expense ratio
- The Northern Small Cap Index (NSIDX) -- 0.35 percent expense ratio
- The DFA Large Cap International Portfolio (DFALX) -- 0.32 percent expense ratio
- The DFA US Large Company Portfolio (DFUSX) -- 0.10 percent expense ratio
- The DFA US Small Cap Portfolio (DFSTX) -- 0.40 percent expense ratio
- Vanguard Developed Markets Index (VDMIX) -- 0.22 percent expense ratio
- Vanguard 500 Index (VFINX) -- 0.07 percent expense ratio
- Vanguard Small Cap Index (NAESX) -- 0.14 percent expense ratio
Let's see if investors are getting what they pay for:
In all three asset classes, DFA's portfolios have outperformed the comparable Northern Trust fund. The likely reason for the outperformance in the small cap space is that the DFA fund gets deeper exposure to small caps than the Northern Trust index fund. This more than made up for the slightly higher expense ratio of the DFA fund.
Northern Trust also offers active funds for those who want to try to beat the market. As we've done with other fund families such as Waddell & Reed and Russell, we'll look at the performance of Northern Trust's fund that have passive counterparts. As with the comparison above, these are the funds with records of 10 years or greater.
In the domestic large-cap, domestic small-cap and international large-cap asset classes, the actively managed Northern Trust funds underperformed their passive counterparts as well as the Vanguard and DFA funds. The Northern Trust large-cap value and small-cap value funds outperformed Vanguard but underperformed DFA counterparts.
Given Northern Trust's failure to deliver alpha, you might ask why it continues to try. Then again, you may already know the answer. They make more money from their active funds, transferring assets from your account to theirs.
The lesson here is simple: If you must have your trusts at Northern Trust, insist on using their index products. More importantly, when you consider the costs and services offered by Northern Trust versus another trust company, include the opportunity cost of being locked into Northern Trust investments into your decision.
More on MoneyWatch:
Does Waddell & Reed Back Up Its Claims Do Waddell & Reed's Ivy Funds Add Value? First Quarter Update on 2011's Sure Things What Would Happen if Everyone Indexed? Quest for Alpha: What You Need to Consider When Handling Your Own Investments
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