What is NOT a benefit of an Equity Index Fund over an Actively Managed Equity Mutual Fund?

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Question: What is NOT a benefit of an Equity Index Fund over an Actively Managed Equity Mutual Fund?

Option 1: 'Lower Expense Ratios than the typical actively managed fund.' A core advantage of index funds is their typically lower expense ratios due to passive management and simpler replication strategies. This option correctly describes a benefit of index funds, so it is not the NOT-benefit.

Option 2: 'Better Diversification than the typical actively managed fund.' Broad market exposure is a hallmark of index funds, offering wide diversification across the index they track. In many cases, this level of diversification is more consistent and cost-effective than what a single actively managed fund achieves, so this is a true benefit of index funds.

Option 3: 'Beat the S&P 500 more frequently than the typical actively managed fund.' This statement asserts that index funds routinely beat the S&P 500 compared to active funds. In reality, index funds are designed to match the performance of the index (e.g., the S&P 500), not beat it, and while some active funds may outperform in certain periods, index funds do not have the goal or guarantee of beating the index. This makes the claim incorrect as a general benefit of index funds.

Option 4: 'Lower Trading Costs than the typical actively managed fund.' Since index funds trade less frequently and often only to rebalance with the index, they typically incur lower trading costs than actively managed funds, which buy and sell more often in an attempt to outperform. This is a recognized benefit of index funds.

In summary, options 1, 2, and 4 describe common, real advantages of Equity Index Funds over actively managed funds, whereas option 3 describes an outcome that is not inherently true of index funds as a general benefit.

MGT 012Y 001 SQ 2025 Week 9 HW - Investing Basics

What is NOT a benefit of an Equity Index Fund over an Actively Managed Equity Mutual Fund?

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