Index vs. active — Nest Egg Math

Index vs. actively managed — the real gap

An actively managed fund isn't just a higher expense ratio. Higher turnover inside the fund tends to generate more taxable capital-gains distributions along the way, even in a year the fund loses money — a cost the fee-drag lesson alone doesn't capture.

The comparison

Same starting balance, same contributions, same gross return — this time the active fund also carries an estimated extra tax drag from its distributions, on top of its higher expense ratio.

An index fund charging 0.05% a year versus an actively managed fund charging 0.75% — plus an estimated 0.3% a year in extra tax drag from the active fund's capital-gains distributions.

Assumptions — change anything

Starting balance$20,000

Annual contribution$6,000

Years invested30

Annual return before fees7%

Index fund expense ratio0.05%

Active fund expense ratio0.75%

Estimated capital-gains tax drag0.3%

Years

Index fund (0.05%) stays ahead across the whole period shown — no crossover at these assumptions. A lower expense ratio always wins over time — there's no crossover to look for here.

After 30 years, the index fund is worth $711,817 versus $583,451 for the active fund — a gap of $128,366.

The capital-gains tax drag is a stated estimate, not a modeled simulation of the active fund's actual turnover and distributions — real active funds vary widely (spec §3.1).

What the model does and doesn't account for

It reuses the same compounding engine as the fee drag lesson, adding a flat, estimated capital-gains tax drag to the active fund's effective expense ratio. It does not simulate the active fund's actual holdings, turnover, or distribution schedule — real funds vary widely, and this is meant to show the shape of the effect, not price any specific fund. See the About & methodology page for more on how these lessons are built.