Are index funds better than actively managed funds?

For most people, over long periods, the evidence favours a low-cost index fund. S&P’s SPIVA scorecard, published since 2002, finds that most actively managed funds trail the index they set out to beat, and over longer periods that majority generally grows. An index fund is not a safer investment than the market — it is the market, held cheaply. What it removes is the risk of picking the wrong manager and the cost of paying for one.

What each one is

An index fund (or index ETF) buys every company in a published index, in proportion, and charges little because there is nothing to decide. An active fund employs a manager to choose which securities to hold and when, aiming to beat a benchmark index, and charges more to pay for that research and trading.

Why the average active fund must lag

William Sharpe set out the arithmetic in 1991. Every share in a market is held by someone, so before costs the average actively managed pound, rupee or dollar must earn the market’s return — the same as the average passively managed one. After costs, the active average must earn less, because it pays more to run. That is not a claim that no manager has skill; it says the group as a whole cannot beat the market by more than nothing, and pays for trying.

What the evidence shows

SPIVA counts funds that closed or merged during the period as well as the survivors, which matters: of the US large-cap funds that existed twenty years before the end of 2025, only about 35% were still running at the end. Its US figures to 31 December 2025:

Short periods swing about. In 2025 only 41% of US small-cap funds trailed their index — yet over twenty years 90.3% of them did. A good year or two is common; a good twenty years is rare, and nobody can tell you in advance which manager will have one.

What an index fund does not do

• It does not protect you from a fall. The S&P 500 lost 36.6% in 2008 including dividends; an index fund tracking it fell with it.
• Not every index is broad. A fund tracking one sector, one small country or a handful of companies is concentrated, however cheap it is.
• Index funds differ in cost too. Two funds tracking the same index can charge very different amounts; compare the all-in cost, not the label.

Common mistakes

• Choosing a fund because it topped last year’s table. The SPIVA figures above are the reason that rarely works.
• Owning several funds that track overlapping indices and believing that is diversification.
• Comparing an active fund with an index fund on return alone, without subtracting what each one costs.
• Selling an index fund after a fall because it “failed”. It did what it was built to do: follow the market down and back.

What would change the answer

If you have a specific reason to hold something an index cannot give you, or a manager whose all-in cost is close to an index fund’s, the gap narrows. The burden of proof stays with the higher-cost option, because its cost is certain and its extra return is not. See how much fees matter for what the difference compounds to.

In Nivritee, the Concentration reading on Investment Performance counts a fund or an ETF as many companies, not one, so a portfolio of funds reads as having no single-company positions. Nivritee never recommends a fund or a provider.