One Reason Why Shares Beat Funds

Here’s how you could outperform funds in the long run.

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

While investing in funds can deliver high returns in the long run, it may be possible for investors to outperform them. Active funds charge a management fee each year which can vary, but is usually in the region of 1%. This may not sound like a significant cost to an investor. However, when annual total returns are expected to be 7% – 8%, it can remove a significant part of returns when compounded over the long run.

Clearly, some active fund managers justify their fees and are able to outperform the wider market or their benchmark by more than 1% per annum. For savvy investors, though, there may be an even better means of accessing a significant proportion of active management performance for a lower cost.

Replicating a portfolio

Funds typically release factsheets on a monthly basis. They provide a range of information and commentary regarding the performance of the fund during the period. They also offer a list of the top ten holdings within the fund as at the date of the factsheet.

In many cases, the top ten holdings within a fund make up a sizeable proportion of the total fund. For some funds which hold a concentrated portfolio made up of a small number of stocks, this could be as much as 60% or more of the total fund. Therefore, those ten companies have a significant impact on the overall performance of the fund.

Investors could feasibly buy the shares included on the top ten holdings list when the fund factsheet is released at the end of the month. They could then monitor the news flow of the fund and check up on future monthly factsheets in order to determine whether there have been any purchases or sales of the top ten holdings. Since many funds invest for the long term, there is unlikely to be a large turnover of holdings, which makes the job of replicating the largest holdings of a fund easier for an investor.

Logistics

Clearly, buying the top holdings of a fund is not a perfect means of replicating the fund. Since not all of the stocks within a fund will be purchased, the performance of the investor’s portfolio will not perfectly track the fund in the long run. Furthermore, there may be a delay between the fund buying or selling a position and the investor doing likewise. This could also contribute to a difference in performance between the two.

However, the lack of a management fee may make up for these risks. And with the investor taking positions in the fund’s conviction buys, it may be possible to access the best ideas of the particular fund manager. As such, as a means of finding new ideas and seeking to improve portfolio performance, the strategy could add value for an investor.

Should you invest $1,000 in Shopify right now?

Before you buy stock in Shopify, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Shopify wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Retirement

Top Canadian Value Stocks I’d Hold in My TFSA for the Next Decade

These Canadian value stocks have significant growth potential and will enhance your TFSA portfolio’s return in the long run.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

ways to boost income
Dividend Stocks

Top Canadian Value Stocks I’d Buy for Dividend Growth and Appreciation

If you are looking for income and capital appreciation, here are three Canadian value stocks for a great total return…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Canadian Stock to Buy With $2,000 Right Now

The company’s powerful combination of growth, income, and value, positions it well to deliver solid returns, making it a smart…

Read more »

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

This 10.6 Percent Dividend Stock Pays Cash Every Single Month

Are you looking to invest for a rainy day? This 10.6% dividend stock pays cash every month, irrespective of the…

Read more »

money goes up and down in balance
Retirement

Where I’d Invest $10,000 in Canadian Value Stocks for Long-term Growth

Suncor Energy Inc (TSX:SU) is a quality Canadian value stock.

Read more »

A worker gives a business presentation.
Dividend Stocks

Market Dip: Opportunity or Risk This April?

This market dip might have investors worried, but should they be excited instead?

Read more »