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Why Most Actively Managed Funds Underperform the Index

Beginner Investing • 6 min

What this lesson is about

Year after year, the majority of professional stock-pickers fail to beat a simple index fund, here's the math behind why, and what it means for how you should actually invest.

2 parts · a quick check after each · then the quiz

Part 1 of 2

Every year, S&P's SPIVA report shows the same result: most actively managed U.S. stock funds can't beat their benchmark index over 10+ year periods. This isn't just a one-off issue. It's a consistent pattern that’s been around for decades.

Active funds typically have higher fees than passive index funds. Passive funds simply hold stocks in an index like the S&P 500 with little trading. Those higher fees need to be earned back through better stock-picking just to match the index. Actually beating it is even harder. Doing this consistently, year after year, across many managers, is extraordinarily tough.

Insider Angle: There's a subtler issue that makes active funds look better than they are: survivorship bias. Poorly performing funds often shut down or merge, disappearing from the historical data. When you check "active funds that still exist today," you’re only seeing the survivors. This skews the average performance of the original group. The full picture, including funds that have disappeared, is even worse for active management than the headline numbers suggest.
Active against the indexFees move the whole distribution left. That is the whole story.

Quick check

What has extensive long-term research (like S&P's SPIVA reports) generally found about actively managed funds versus their benchmark index?

Part 2 of 2

Try This: Look up S&P's latest SPIVA scorecard (it's a free report) and find the percentage of large-cap active funds that underperformed the S&P 500 over the last 10 and 15 years.

Quick check

Why do fees matter so much to an active fund's chances of beating its index over time?

Try This - Live Data

Real recent performance comparison between an actively-managed growth ETF (ARKK) and the S&P 500 index (SPY).

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Quiz

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