As an investor, I often explore different avenues to grow my wealth, and one option that consistently stands out is actively managed mutual funds. TD Ameritrade, now part of Charles Schwab, offers a robust selection of these funds, catering to various investment strategies. In this guide, I’ll break down everything you need to know—from how these funds work to their pros and cons, performance metrics, and how they compare to passive alternatives.
Table of Contents
What Are Actively Managed Mutual Funds?
Actively managed mutual funds are investment vehicles where professional portfolio managers make deliberate decisions to buy or sell assets in an attempt to outperform a benchmark index. Unlike passive funds (like index funds or ETFs), which track a market index, active funds rely on research, market forecasts, and the expertise of fund managers.
Key Features of Actively Managed Funds
- Professional Management: Fund managers analyze market trends and adjust holdings.
- Higher Expense Ratios: Active management costs more than passive strategies.
- Potential for Outperformance: Skilled managers may beat the market.
- Tax Implications: Frequent trading can lead to higher capital gains distributions.
Why Consider Actively Managed Funds at TD Ameritrade?
TD Ameritrade provides access to thousands of mutual funds, including no-transaction-fee (NTF) options. Here’s why I find them compelling:
- Diverse Selection: TD Ameritrade’s platform offers funds from top asset managers like Fidelity, T. Rowe Price, and American Funds.
- No-Transaction-Fee (NTF) Funds: Investors can buy and sell certain funds without paying commissions.
- Research Tools: The platform provides Morningstar ratings, performance history, and risk metrics.
- Automatic Investing: You can set up systematic investment plans (SIPs) for dollar-cost averaging.
Comparing Active vs. Passive Funds
| Feature | Actively Managed Funds | Passive Index Funds |
|---|---|---|
| Management Style | Hands-on, discretionary | Rules-based, tracks index |
| Expense Ratio | Higher (0.5% – 1.5%) | Lower (0.03% – 0.20%) |
| Performance Goal | Beat the benchmark | Match the benchmark |
| Tax Efficiency | Lower (more turnover) | Higher (less turnover) |
| Best For | Investors seeking alpha | Cost-conscious investors |
Performance Analysis: Do Active Funds Outperform?
The debate over active vs. passive investing is ongoing. While some active funds outperform, many fail to beat their benchmarks after fees. According to the SPIVA Scorecard, over a 10-year period, nearly 85% of large-cap fund managers underperform the S&P 500.
However, certain categories—like small-cap or international funds—have a better track record for active management due to market inefficiencies.
Calculating Expected Returns
Suppose an active fund charges a 1% expense ratio and aims to outperform the S&P 500 by 2% annually. The net expected return would be:
Expected\ Return = (Benchmark\ Return + Alpha) - Expense\ RatioIf the S&P 500 returns 8%:
Expected\ Return = (8\% + 2\%) - 1\% = 9\%But if the fund fails to generate alpha, the investor ends up with:
Expected\ Return = 8\% - 1\% = 7\%This underperformance highlights the importance of selecting skilled managers.
How to Choose the Right Active Fund on TD Ameritrade
When I screen for active funds, I consider:
- Historical Performance: Look for consistent outperformance over 5+ years.
- Expense Ratio: Lower fees improve net returns.
- Manager Tenure: Experienced managers tend to have more stable strategies.
- Risk Metrics: Check Sharpe ratio and standard deviation.
- Tax Efficiency: Funds with low turnover minimize capital gains.
Example: Fidelity Contrafund (FCNTX) vs. Vanguard 500 Index (VFIAX)
| Metric | Fidelity Contrafund (Active) | Vanguard 500 Index (Passive) |
|---|---|---|
| Expense Ratio | 0.86% | 0.04% |
| 10-Yr Return | 11.32% | 12.03% |
| Sharpe Ratio | 0.78 | 0.82 |
| Turnover Rate | 29% | 4% |
Despite strong performance, the Fidelity Contrafund slightly lagged the Vanguard 500 Index after fees.
Tax Considerations
Active funds often generate short-term capital gains, taxed at ordinary income rates (up to 37%). In contrast, passive funds typically have long-term capital gains, taxed at lower rates (0%, 15%, or 20%).
Tax Drag Calculation
If an active fund generates $1,000 in short-term gains for an investor in the 24% tax bracket:
Tax\ Due = \$1,000 \times 24\% = \$240A passive fund with the same gains taxed at 15%:
Tax\ Due = \$1,000 \times 15\% = \$150This $90 difference reduces net returns.
Final Thoughts: Are Active Funds Worth It?
While actively managed funds can offer higher returns in certain market conditions, the majority fail to justify their fees over the long term. At TD Ameritrade, investors have the tools to compare funds rigorously.
My Recommendation
- For Core Holdings: Stick with low-cost index funds.
- For Satellite Strategies: Consider active funds in inefficient markets (small-cap, emerging markets).
- Monitor Performance: Regularly review whether the fund’s alpha justifies its costs.
By carefully selecting funds and keeping costs low, investors can strike a balance between active and passive strategies. TD Ameritrade’s platform makes this process easier with robust screening tools and research resources.
