Vanguard founder, John Bogle, is investing’s Pied Piper.  He first blew his pipe in 1976.  Things started slowly.  But eventually, legions followed him into index funds.  Actively managed funds, he says, are mostly a waste of money.  They earn lower returns because their fees are higher.  But Bogle owns at least one actively managed fund—and it has thrashed the market.

It’s called the Vanguard Windsor fund. If $10,000 were invested in it from August 1976 until March 3, 2015, it would have grown to $967,947 versus $581,814 for Vanguard’s S&P 500 index.  Few people think of Vanguard as an actively managed mutual fund company.  But it has more active funds than index funds. 

In 2006, Morningstar writer Sue Stevens spoke to Bogle about his personal portfolio. “What may surprise some of you,” she writes, “is that not all of Jack's portfolio is indexed. About 24 percent is invested in actively managed funds.”

This might rattle some of the indexing die-hards on the Bogleheads forum.  What’s more, Business Insider says Vanguard’s active funds are beating its own indexes. “Over the last three years, 20 out of Vanguard's 30 actively managed stock funds outperformed their benchmarks by an average of 1.1 percentage points a year, according to Lipper data.”  

But a good three-year performance may not win the race.  Take the example of a 100- meter footrace.  Usain Bolt rarely leads after the first 30 meters. Watch the video.  He pulls ahead later.

I like 10-year comparisons, especially when they include schizophrenic market conditions.  After all, as a lifelong investor, your money will ride both Bears and Bulls. In the past 10 years, we saw stocks soar from 2004 to 2007.  They crashed between 2008 and 2009.  They rocked again between 2009 and 2014.

So let’s see how Vanguard’s active management funds do against their index compatriots over a 10 year “race.” I put seven of Vanguard’s asset class categories on the starting blocks:  U.S. Large Cap, U.S. Mid Cap, U.S. Small Cap, International Stock, Long Term Bonds, Medium Term Bonds and Short Term Bonds.  I wanted to see whether their active funds beat their indexes.

Vanguard’s Large Cap active funds take the initial lead. In the 10 years ending February 28, 2015, they averaged 8.47 percent.  Its indexes weren’t far behind, averaging 8.14 percent.  So, chalk one up for the active funds.  They lead by an annualized 0.33 percent.

But the active Mid Cap funds trail their index fund competition. The indexes returned 9.83 percent, compared to Vanguard’s active fund returns of 9.53 percent.  Active funds now lead by a scant 0.03 percent.

In  the Small Cap stretch, the index funds also beat the actives.  Vanguard’s Small Cap indexes averaged 9.69 percent versus 9.25 percent for its actively managed funds.  After 3 of the 7 categories, indexes lead by 0.41 percent.

But Vanguard’s active funds surge in the International asset class.  They averaged 6.23 percent.  Indexes limped along at 5.06 percent.  So, after four asset classes, passive funds trail active funds by 0.76 percent.

Vanguard’s indexes, however, aren’t dead and buried.  Intermediate Treasury bond indexes averaged 5.76 percent.  Vanguard’s active funds, by comparison, suffered from dead-leg.  They gained just 4.69 percent.  Now we’re really running a race.  After 5 asset classes, indexes lead by 0.31 percent.

Active funds gain a bit in the Long Term Bond race.  They averaged 7.47 percent compared to 7.45 percent for the indexes.  But it’s too little too late, as the index funds make one final surge.  They pull ahead in the Short Term Bond category, averaging 3.42 percent compared to 3.0 percent for the active funds.

After 7 asset class comparisons, Vanguard’s indexes beat its own active funds by 0.71 percent per year.  If we invested equal amounts into each asset class “horse”, however, the compounding lead is just 0.11 percent per year. Add a bit more of an advantage for tax-efficiency (see the figures below) and the index funds win by a bit more.

 So he might own a couple of active funds.  But Bogle’s tune is still worth hearing. 
“Just buy the damn index fund,” he sings.

Vanguard’s Indexes vs. Its Actively Managed Funds

Ten Years Ending February 2015
Category 10 Year Annual Pre-Tax Return 10 Year Annual Tax-Adjusted Return
Vanguard U.S. Large Cap Indexes
Vanguard 500 Index Admiral 7.98% 7.55%
Vanguard FTSE Social Index 7.25% 6.96%
Vanguard Growth Index Admiral 9.35% 9.09%
Vanguard Large Cap Index Admiral 8.33% 7.92%
Vanguard Total Stock Market Index Admiral 8.47% 8.06%
Vanguard Value Index Admiral 7.28% 6.43%
 
Vanguard U.S. Large Cap Actively Managed Funds
Vanguard Dividend Growth 9.29% 8.79%
Vanguard Equity Income 8.39% 7.32%
Vanguard Growth and Income 7.13% 6.4%
Vanguard Morgan Growth 8.68% 7.91%
Vanguard PRIMECAP (Closed to new investors) 10.87% 9.94%
Vanguard PRIMECAP Core (Closed to new investors) 10.64% 10.07%
Vanguard Tax Managed Capital App 8.38% 8.02%
Vanguard U.S. Growth 8.58% 8.27%
Vanguard U.S. Value 6.88% 6.0%
Vanguard Windsor 7.15% 6.22%
Vanguard Windsor II 7.25% 6.22%
 
Vanguard Index Fund Category Average 8.14% 7.69%
Vanguard Active Fund Category Average 8.47% 7.74%
Category 10 Year Pre-Tax Return 10 Year Tax-Adjusted Return
Vanguard U.S. Mid Cap Indexes
Vanguard Extended Market Index Admiral 9.84% 9.5%
Vanguard Mid Cap Index Admiral 9.81% 9.49%
 
Vanguard U.S. Mid Cap Actively Managed Funds
Vanguard Capital Opportunity Growth (Closed to new investors) 11.24% 10.4%
Vanguard Capital Value 7.93% 6.42%
Vanguard Mid Cap Growth 10.48% 9.23%
Vanguard Select Value 9.26% 8.32%
Vanguard Strategic Equity 8.75% 7.93%
 
Vanguard Index Fund Category Average 9.83% 9.5%
Vanguard Active Fund Category Average 9.53% 8.45%
Category 10 Year Pre-Tax Return 10 Year Tax-Adjusted Return
Vanguard U.S. Small Cap Index Funds
Vanguard Small Cap Index Admiral 9.69% 9.3%
 
Vanguard U.S. Small Cap Actively Managed Funds
Vanguard Tax Managed Small Cap 9.25% 9.03%
Category 10 Year Pre-Tax Return 10 Year Tax-Adjusted Return
Vanguard International Stock Index Funds
Vanguard Developed Markets Index Admiral 4.98% 4.48%
Vanguard European Stock Index Admiral 5.14% 4.22%
Vanguard International Stock Actively Managed Funds
Vanguard International Explorer 6.79% 5.59%
Vanguard International Growth 6.61% 5.59%
Vanguard International Value 5.3% 4.35%
 
Vanguard Index Fund Category Average 5.06% 4.35%
Vanguard Active Fund Category Average 6.23% 5.17%
Category 10 Year Pre-Tax Return 10 Year Tax-Adjusted Return
Vanguard Intermediate Term Treasury Bond Index
Vanguard Intermediate Term Bond Index Admiral 5.76% 4.10%
Vanguard Intermediate Term Treasury Bond Actively Managed
Vanguard Intermediate Term Treasury Bond Fund 4.85% 3.42%
Vanguard GNMA Fund 4.83% 3.25%
Vanguard Inflation Protected Securities 4.38% 3.08%
 
Vanguard Index Fund Category Average 5.76% 4.10%
Vanguard Active Fund Category Average 4.69% 3.25%
Category 10 Year Pre-Tax Return 10 Year Tax-Adjusted Return
Vanguard Long Term Treasury Bond Index
Vanguard Long Term Bond Index 7.45% 5.51%
Vanguard Long Term Treasury Bond Actively Managed
Vanguard Long Term Treasury Fund 7.47% 5.55%
Category 10 Year Pre-Tax Return 10 Year Tax-Adjusted Return
Vanguard Short Term Bond Index
Vanguard Short Term Bond Index Admiral 3.42% 2.38%
Vanguard Short Term Bond Actively Managed
Vanguard Short Term Federal Bond Fund 3.19% 2.22%
Vanguard Short Term Treasury Fund 2.8% 1.95%
 
Vanguard Index Fund Category Average 3.42% 2.38%
Vanguard Active Fund Category Average 3.0% 2.09%

Growth Of $10,000 Invested Into Each Category

Ten Years Ending February 2015
  Vanguard’s Indexes Vanguard’s Actively Managed Funds
U.S. Large Cap $21,870.75 $22,547.40
U.S. Mid Cap $25,539.35 $24,850.26
U.S. Small Cap $25,215.66 $24,222.25
International Stock $16,382.27 $18,300.87
Intermediate Term Treasury Bond $17,507.11 $15,814.37
Long Term Treasury Bond $20,514.65 $20,552.87
Short Term Treasury Bond $13,997.33 $13,439.16
Total Value $141,027.12 $139,727.18
Average Compounding Return 7.26% 7.15%

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat.