What Does an Index vs Active Fund Comparison Show?

It answers a question that fund marketing rarely puts in dollar terms: how much gross outperformance must an active manager generate just to cover the higher cost of their fund? Expense ratios are small numbers — 0.75% against 0.04% — but they apply to the entire balance every year, and the money they consume never compounds. The comparison tracks both funds side by side and reports the break-even gross return the active fund would need to tie.

The tool also models a cost that fee comparisons often miss: tax drag. Active funds trade more, realise more gains and distribute them to holders, who pay tax on gains they did not choose to realise. Index funds hold positions, distribute far less and let unrealised gains compound until the investor decides to sell. In a taxable account that difference can be as large as the expense ratio gap itself.

How It Works

Each fund earns its gross return, pays its expense ratio and its tax drag, and compounds at the remaining net rate for the holding period. The default scenario gives the active fund a half-point of genuine gross outperformance — 7.5% against 7% — and a 0.75% expense ratio against 0.04%. Despite the manager's skill, the active fund still needs a gross return of about 8.16% just to match the index fund after costs, and falls roughly $22,000 behind over twenty years once the tax drag from its higher turnover is counted.

The table traces both balances year by year and shows the cumulative fees each fund has paid, which makes the compounding of cost visible: the fee total is not the expense ratio multiplied by the years, because the fee is charged on a growing balance. Summary Statistics reports the net returns each fund delivers, the break-even active gross return, the alpha required in percentage points, and fees as a share of each fund's result.

The break-even figure is the most useful output for a decision. It converts a fee difference into a performance hurdle, which is the form in which the choice should actually be evaluated. A 0.7-point fee gap demands 0.7 points of gross alpha — every year, for decades — before the active fund has done anything for its holder.

Understanding Your Results

The primary card shows the break-even gross return for the active fund with the alpha hurdle implied by the cost gap. The three statistics beside it give the terminal value of each fund and the extra fees the active fund consumed. A useful exercise is to set the active gross return equal to the index gross return: the difference in terminal values is then entirely cost, which is the honest baseline for any active-versus-index argument.

Summary Statistics breaks out the net returns, the fees each fund paid, the fee difference and the share of each result consumed by fees. Note that the tax drag input applies every year, which mirrors how distributed gains are taxed, but it is a simplification: real tax outcomes depend on your bracket and on whether the account is tax-advantaged. If the money is in an IRA or 401(k), set both tax drags to zero and the comparison becomes purely about expense ratios and gross returns.

Data vintage: expense ratios, tax drag and gross returns are user inputs, not forecasts. Typical broad-market index funds charge 0.03–0.10% and active equity funds 0.5–1.2%; advisory layers add a further 0.5–1%.