Investments from Wealthfront come from index funds, which are low-cost index funds that own a spread of stocks that roughly match the S&P 500. But Wealthfront tries to beat this by measuring the effect of a fund manager. In its report on its findings, Wealthfront wrote:
“We analyze whether an active fund manager (of a US or international equity fund) – meaning one who deviates from passive indexing – can add value over long horizons (5-year, 10-year, and 15-year rolling periods) by tracking their stock-picking skill.
“We find that net of fees, there is no evidence that active managers with strong past performance (top quartile) can pick stocks better than an index over any rolling 15 year period. Active funds with weak past performance (bottom quartile) exhibit worse relative performance for all rolling periods.”
Fees are a big issue for index funds as because they don’t have the research staffs that active managers use. In fact, 63% of U.S. equity funds have a management fee of more than 1.5% and just 6% have a fee of less than 1.0%, according to an analysis from Morningstar.