Index Funds vs Active: The Math Nobody Argues With
In 2025, 79% of actively managed large-cap US equity funds underperformed the S&P 500 — the fourth-worst year on record for active managers. Stretch the window to two decades, and roughly 9 in 10 active funds have underperformed the index.
Those numbers come from the S&P's own scorecard (SPIVA), which tracks active funds against their benchmark every year. This article walks through the data, the fee math, and what it means for a typical investor in the US, UK, or Australia.
What an index fund actually is
An index fund doesn't try to beat the market. It buys a slice of everything — the S&P 500's largest US companies, for example — and holds. Historically, the S&P 500 has returned about 10% a year on average, before inflation. After inflation, the long-run real return is closer to 6–7% a year.
It's not glamorous. It's math.
The data: how often active managers win
SPIVA's 2025 year-end report showed:
- 79% of active large-cap US funds underperformed the S&P 500 in 2025 (vs 65% in 2024)
- ~92% of active large-cap US funds underperformed over the 20 years to 2025
- Active US mutual funds saw roughly $640 billion in net outflows in 2025, while passive assets surpassed active for the first time
About 9 in 10 professional large-cap fund managers have trailed a plain index over the past two decades. — SPIVA data, via WealthManagement.com (2026)
The fee math: 0.05% vs 0.64%
According to the Investment Company Institute's 2025 fee report, the average expense ratio for index equity mutual funds is 0.05% a year. The average active equity fund charges 0.64% — more than twelve times as much.
| Fund type | Average annual fee |
|---|---|
| Index equity fund | 0.05% |
| Active equity fund | 0.64% |
Illustration, not a promise: $10,000 invested at 7% before fees for 30 years ends at roughly $74,000 with index fees (0.05%) vs about $66,000 with active fees (0.64%). Same market, same returns — an ~$8,000 difference from fees alone.
Honest caveats
- About 1 in 10 active funds did beat the index over 20 years. It happens.
- Survivorship bias is real — funds that closed are already counted in the scorecard.
- Active managers have a better record in smaller, less efficient markets (international small caps, some emerging markets).
- Past data shows probabilities, not certainties.
The takeaway
Build the core of your portfolio with low-cost index funds — the math is on your side. If you want some active funds, treat them as a small satellite, not the engine. Dollar-cost average, keep costs low, and let compounding do the heavy lifting.
Data & Dividends participates in affiliate programs. Links on this page may be affiliate links; we may earn a commission at no extra cost to you. Sources: SPIVA 2025 year-end scorecard (S&P Dow Jones Indices); ICI, Trends in the Expenses and Fees of Funds, 2025. Figures as of 2025/2026 reporting cycles.