When building long-term wealth, choosing the right investment strategy can make all the difference. With an overwhelming amount of investment options available, many people find themselves considering actively managed funds or mutual funds, yet these often underperform compared to market-tracking ETFs. In this blog, we’ll explore why prioritizing market-tracking ETFs, especially index ETFs, can lead to better returns, lower fees, and more significant wealth accumulation.
1. Most Managed Funds Underperform the Market
While actively managed funds may sound appealing, studies show that most actively managed and mutual funds underperform their benchmark indexes over the long term. In the past decade alone:
- 84.7% of US large-cap managed funds underperformed the S&P 500.
- 93.4% of Canadian equity funds underperformed the S&P/TSX Composite.
What does this mean for investors? Simply put, when you invest in managed funds, the odds are high that you’ll achieve lower returns than you would by investing in an ETF that simply tracks the market. Managed funds aim to “beat” the market, but achieving consistent, superior returns is rare and challenging, largely due to management fees, trading costs, and market inefficiencies that can eat into returns. 
2. Market-Tracking ETFs Offer Strong Long-Term Performance
Market-tracking ETFs, such as index ETFs, are designed to match the performance of a specific market index, like the S&P 500 or the S&P/TSX Composite. Let’s take a closer look at the S&P 500:
- The S&P 500 index tracks 500 of the largest companies in the U.S., including well-known names like Apple, Amazon, Nvidia, and Meta.
- Over the past 30 years, the average annual return for the S&P 500 has been around 10.7%.
By investing in an ETF that tracks the S&P 500 or similar indexes, you can capture the broad market’s returns, allowing your investments to grow in line with the economy and some of the world’s most successful companies. This consistency and growth potential is hard to beat, especially when you factor in the reduced risk of broad diversification.
3. Low Fees Maximize Your Returns
One of the greatest benefits of index-tracking ETFs is their low cost. Actively managed funds come with high fees due to costs like research, management, and administrative expenses. Over time, these fees eat into your returns, reducing the power of compounding. In contrast:
- Many index-tracking ETFs have fees of 0.25% or lower, meaning you keep more of your earnings over time.
This low-cost structure is a major reason market-tracking ETFs outperform managed funds over the long run. Every dollar saved on fees is a dollar that stays invested and can compound over time, allowing your wealth to grow faster.
4. The Power of Compound Growth with Market Returns
When investing for the long term, even small differences in annual returns and fees can have a significant impact. Here’s a quick example:
- Suppose you invest $10,000 annually in a market-tracking ETF that provides an average return of 10% per year. After 30 years, you’d have around $1.82 million.
- If you invested the same amount in a managed fund that returned 8% due to high fees and other factors, you’d end up with only $1.23 million after 30 years.
That’s a difference of over $500,000 due solely to the higher returns of the market-tracking ETF and the lower fees associated with it. By capturing the market’s full returns without excessive fees, you allow compounding to work its magic.
5. Comparing Your Current Investments
If you’re currently invested in mutual funds, savings accounts, or other managed investment products, it’s worth comparing the fees and returns of your current holdings with those of popular market-tracking ETFs. Here’s how to approach it:
- Look at Fees: Actively managed funds often charge between 1-2% or more in management fees. By contrast, index ETFs typically have fees under 0.25%.
- Compare Returns: Check the historical returns of your current investments against market benchmarks like the S&P 500. If your funds underperform the market, they may not be providing the value you’re paying for.
- Assess Long-Term Growth Potential: Consider the long-term impact of fees on your returns. Tools like compound interest calculators can help you project how different fee structures will affect your portfolio over time.
Switching to a market-tracking ETF could significantly increase your wealth by capturing market-level returns while minimizing fees.
Conclusion: Prioritize Market-Tracking ETFs for Better Wealth Growth
Prioritizing market-tracking ETFs is one of the simplest and most effective ways to maximize returns, reduce fees, and compound wealth over time. Unlike managed funds, which often struggle to beat the market, index-tracking ETFs let you benefit from the long-term growth of the economy and leading companies.
To build wealth effectively:
- Invest in Low-Cost, Market-Tracking ETFs: Capture market growth without excessive fees.
- Maximize Returns: Index ETFs can provide steady, reliable returns that outperform most managed funds.
- Let Compounding Work for You: With low fees, your returns can compound to create significant growth over decades.
If you’re serious about building wealth, consider shifting your investment strategy toward market-tracking ETFs to benefit from broad market returns, low fees, and the power of compounding. This strategy simplifies investing while giving you a solid foundation for long-term financial growth.
Want to Start Buying Market-Tracking ETFs?
Open up a self-directed trading account, deposit money into it and then buy the ETFs. It is as simple as that!
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