Active or Passive? Fees, Sustainability and Fund Performance: A Comparative Study of Index Funds and Actively Managed Funds in Sweden

Sammanfattning

This thesis examines whether fees and sustainability grades are associated with fund returns in Sweden when controlling for standardised fund risk level, and how fund performance differs between index funds and actively managed funds. The study focuses on the Swedish fund market, where fund ownership is widespread and sustainability has become an increasingly important factor in investment decisions. By combining traditional fund characteristics, such as fees and risk, with sustainability grades, the thesis aims to contribute to the discussion on what factors are associated with investor-relevant fund performance. The theoretical framework is based on the Efficient Market Hypothesis, Modern Portfolio Theory, ESG theory. These theories are used to interpret the relationship between fund type, fees, sustainability grades, risk level and fund returns. The empirical analysis is based on a quantitative research design using monthly observations from 84 Swedish funds over a five-year period. The sample includes both index funds and actively managed funds. The main dependent variable is net return, while gross return is used as an alternative measure. The main empirical analysis applies random-effects panel regressions with standard errors clustered at the fund level. A pooled OLS model is also estimated as a baseline comparison, while additional specifications using gross returns and interaction terms are used to assess whether the findings are robust across alternative model formulations. The results show that fund type is associated with fund performance. In the main model specifications, actively managed funds are associated with lower returns compared to index funds. This is consistent with previous research suggesting that active funds often struggle to outperform passive alternatives after costs. The findings also show that sustainability grades are statistically associated with fund returns. Since the Morningstar sustainability score is measured as a sustainability risk score, the negative ESG coefficient indicates that funds with lower sustainability risk are associated with higher returns in the sample. Fees are also associated with returns, although the relationship is more complex than expected. The positive fee coefficient suggests that fees may capture broader fund characteristics, such as fund type, investment strategy or market exposure, rather than only the cost paid by investors. The standardised risk level does not show a statistically significant relationship with monthly fund returns. Overall, the thesis finds that fees and sustainability grades are associated with fund returns in the Swedish sample, while standardised risk level is not statistically significant. The results also indicate that index funds performed better than actively managed funds during the analysed period. The findings should be interpreted as statistical associations rather than causal effects.