Great point! The only quibble I have is that 'compound return' doesn't include fees. However, 'total return' includes both fees & distributions (such as dividends).
If we use fairly common fees, the table looks more like this:
Option 1: 0.25% fee, Option 2: 1.5% fee
Year 1 7.75% 13.5%
Year 2 7.75% 5.5%
Year 3 7.75% 2.5%
Year 4 7.75% 17.5%
Year 5 7.75% 4.5%
Total gain: 45.2% 50.7%
Compound/yr 7.75% 8.5%
Once you include the fees (especially if the fund has a 'load' or sales fee) actively managed funds have to do significantly better than low fee index funds just to match total performance.
Why exactly do you think calculating compound return and fees are mutually exclusive? If you want compound return net of fees then you simply calculate that. As a rule most mutual funds do in fact report their performance net of fees.
If we use fairly common fees, the table looks more like this:
Once you include the fees (especially if the fund has a 'load' or sales fee) actively managed funds have to do significantly better than low fee index funds just to match total performance.Edit: formatting