Beyond Expense Ratios: The Hidden Metrics That Define Index Fund Performance
Index funds dominate passive investing, yet their true cost extends far beyond advertised expense ratios. Tracking difference—the gap between fund returns and benchmark performance—reveals structural inefficiencies that erode long-term gains. Tax drag compounds the problem, silently siphoning returns in taxable accounts.
Sophisticated investors analyze replication fidelity and index construction methodologies. Physical replication funds often outperform synthetic counterparts despite higher costs. Securities lending revenue—rarely disclosed—can offset expenses by 10-30 basis points in well-managed funds.
The psychological hurdle remains paramount. Investors chasing low expense ratios frequently overlook tax-efficient vehicles and jurisdictional advantages. Swiss-domiciled funds, for instance, routinely outperform US equivalents for international investors through treaty benefits.
