why are active funds more expensive

Active funds are more expensive than index funds - but why?

Active fund cost drivers

Active funds are more expensive than index funds because of three key drivers.

1. A team of investment specialists: good people don't come cheap
2. Administration higher costs for sales, marketing and events
3. Trading Costs: higher frequency, and for small caps, less liquid holdings

But it does it make a difference?

The evidence is clear:
For highly efficient markets such as US Equities and Global Large Cap Equities, active managers struggle to beat the index persistently over time
For less efficient markets such as UK Small Cap, there is greater potential for active managers to beat the index.

Which way are fund selectors heading

Based on the flows trajectory, there has been a major shift towards index investing.  Fund selectors prefer the certainty of low-cost beta, over the hope of occasional alpha net of fees.

Hoshang Daroga explores this topic further in this article for ETF.com