It's not leverage, in the conventional sense of the word. The index is the benchmark, which is why there's broad correlation. However, the fund also seems like it's been able to outperform its benchmark. Whether this is due to manager skill, extra factor risk or otherwise is unclear.
One thing you may want to confirm is that what you're comparing are total returns.
Good point- (total actual returns after..costs...)Also worth comparisom is the "long term" historical results once all of the expense ratios, commissions, 12-b-1 fees, and "other" are factored in. A true index tracking fund has very low fees as active management is not necessary in an attempt to outperform year in , year out. Many active funds try to largely follow an index as their benchmark, but attempt to outperform based on any number of factors- It could be as simple as increased weighting, market cap weighting, or other "smart" factors that were mentioned.
Note that the past 1.5 years the fund is now outperforming based on the 5 year time frame- with what appears a period of greater outperformance seen in 2015.
If you are interested in this fund, do a longer term lookback-if available- but be sure you do your due diligence in determining the effects of fees that will be charged to pay for that active manager.(s).
I'm a fan of John Bogle-Vanguard funds- Low cost long term diversified approach tracking indexes. Essentially- over time, the low cost index approach out performs almost all active management.
You may find a successful manager for a single fund- but you should research it over longer and shorter periods if it is indeed a consideration.
If you are developing a wider approach to the market long term- you may have difficulty in finding 5 diversified funds/managers that have consistent outperformance based on a net cost basis after all expenses are accounted for. John Bogle would assert that you may find 1 exceptional manager, in a diversified portfolio, but you would then lose out with 2 indexers at a higher cost, and 1 or 2 managers that also underperform the index at higher costs. (over a longer term)
Costs matter- a .50% or 1% cost for an active manager compared to a .10 % cost for an index is quite a hurdle to overcome year in and year out.
If considering active managers- see how the fund performed in periods of large market declines-over a longer time frame.
Keep in mind- active fund managers get paid whether the account declines or goes higher-
When a fund is in a period of decline - a .10 expense ratio is easier to pay up for than a .90 expense ratio. The Bull market since 2009 is long in the tooth. How did this fund outperform in the recent period? Was it market weighting? What occurs in a market swing?
A 40% fund decline indeed results in lower funds to assess the management fees from.
That might give you a sense of whether their approach allows you to feel comfortable in periods of drawdowns. If the fund declines more than the index- The approach for outperformance also brings with it a potential for a greater volatility/decline.
How volatile is your fund compared with the index?
Bottom line- compare the active manager's costs with the long term annual performance.
Do the actual year by year impact of annual fees charged based on returns.
Do not pay any load fees.
