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Index funds have cost advantages ;

i) they are passive leading to low management fees (.2% vs. 1-2% for managed funds)

ii) trading costs are low due to infrequent trading (.25% vs. 1.25% for managed funds)

iii) cash drag (i.e. losses due to the necessity of holding cash - typically 5% for a managed fund) is minimized

iv) there are favorable tax consequences associated with fewer transactions

v) active (large block) trading affects price adversely (for them).
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