Another aspect of the apples-and-oranges comparison is the impact of cash balances. Since fund investors continually add or withdraw money, funds are partly invested in fluctuating cash balances. When the market rises strongly, the interest on this cash doesn’t keep up and the fund return lags the return on the equity portion of its holdings. Conversely, when the market is down sharply, the losses on the fund’s equity position are reduced to the extent it is in cash and by the interest it gets on that cash. The impact of this cash drag is generally small.
Have wondered whether this impacts index funds’ performance as well. I guess I’ll take “it’s small” for now.
