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For the core of a diversified long-term portfolio, low-cost index mutual funds are the better default; an actively managed fund is an exception that should justify its higher cost and its place in the portfolio. The distinction matters: active versus index describes how a fund is managed, while diversification comes from spreading investments across asset classes, regions, and types of securities. An S&P 500 index fund, for example, can be a low-cost building block while still leaving a portfolio concentrated in one country.
| Name | Best for | Key spec | Checked |
|---|---|---|---|
| Index mutual fund | A low-cost portfolio core seeking market-like returns | Typically tracks an index; 0.05% asset-weighted average expense ratio for equity index mutual funds in 2025 | November 2026 |
| Actively managed mutual fund | A defined strategy or exposure an investor believes justifies its cost | Manager chooses securities and exposures; 0.64% asset-weighted average expense ratio for active equity mutual funds in 2025 | November 2026 |
What is the difference between active and index mutual funds?
An index mutual fund generally seeks to replicate a specified index by holding all or a representative sample of its securities. An active fund gives its manager discretion to select securities or adjust sector, geographic, or other exposures within the fund’s mandate. That discretion may be used to seek higher returns or objectives such as managing volatility or limiting downside, but it does not guarantee those outcomes.
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In practice, an index fund aims to deliver the return of its benchmark minus fund expenses and tracking differences. An active fund aims to do something different from its benchmark, and its result depends on its holdings, decisions, expenses, and the benchmark that fairly represents its investment style. Both types can be diversified or concentrated: “active” does not mean diversified, and “index” does not automatically mean globally diversified.
The Investment Company Institute (ICI) notes that index equity funds tend to cost less partly because they trade less, many track large-cap US blend indexes that are relatively inexpensive to manage, and large funds can spread fixed costs across more assets. At year-end 2025, the average index equity mutual fund held $15.0 billion in assets, compared with $2.8 billion for the average actively managed equity mutual fund, according to the ICI’s 2026 Investment Company Fact Book.
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Do active funds beat index funds over the long term?
Most active US equity mutual funds have trailed their style-appropriate benchmarks over long periods, after fund expenses. In the SPIVA U.S. Mid-Year 2026 scorecard, 92.61% of US large-cap active funds underperformed the S&P 500 over the 20 years ending June 30, 2026. That is a historical result, not a forecast or a promise about what will happen next.
The scorecard compares funds with category benchmarks rather than treating the S&P 500 as the right yardstick for every strategy. The following figures show the percentage of funds that underperformed the matched benchmark; they are not percentage returns. Higher values mean more funds trailed. The Mid-Year 2026 cells below come from Report 1a as transcribed by the Retirement Literacy Foundation.
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|---|---|---|---|---|---|---|
| All domestic funds | S&P Composite 1500 | 60.82% | 91.40% | 88.19% | 93.25% | 94.89% |
| All large-cap funds | S&P 500 | 78.69% | 89.32% | 83.33% | 90.49% | 92.61% |
| All mid-cap funds | S&P MidCap 400 | 76.21% | 76.95% | 78.38% | 87.72% | 90.53% |
| All small-cap funds | S&P SmallCap 600 | 68.50% | 55.58% | 71.08% | 91.12% | 91.16% |
| All multi-cap funds | S&P Composite 1500 | 63.87% | 88.03% | 86.66% | 92.49% | 93.57% |
| Large-cap growth | S&P 500 Growth | 91.84% | 95.48% | 93.02% | 100.00% | 99.52% |
| Large-cap core | S&P 500 | 79.10% | 82.55% | 90.13% | 95.53% | 94.38% |
| Large-cap value | S&P 500 Value | 45.80% | 77.69% | 82.29% | 92.19% | 86.05% |
In every listed category, more than 85% of funds underperformed over 20 years. None of the listed categories had a majority of funds beat its benchmark over 10, 15, or 20 years. These results do not mean every active fund lost, or that an active strategy cannot outperform in a particular period. They show how difficult it has been for the typical active fund to outperform over long horizons.
The pattern is also visible in calendar-year results, though individual years vary. S&P Dow Jones Indices reported that 79% of active large-cap US equity funds underperformed the S&P 500 in 2025, compared with 65% in 2024; it described 2025 as the fourth-worst year for active large-cap managers in the 25-year history of its scorecards. See the Year-End 2025 U.S. Persistence Scorecard.
What percentage of active funds beat the S&P 500?
For US large-cap funds over the 20 years ending June 30, 2026, 7.39% did not underperform the S&P 500; that is the complement of the 92.61% underperformance rate. This does not mean those funds will beat the index in the future, and it is specifically a fund-count statistic for that period and category.
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The distinction between counting funds and counting invested dollars is important. A separate SPIVA survivorship table began with 690 large-cap funds for that 20-year period, and 36.52% remained in the data at the end. That percentage implies roughly 252 funds survived. Combining the reported rates suggests roughly 51 funds both survived and did not underperform; these are approximate derived counts, not headcounts printed by S&P. A screen that shows only funds still open omits many funds that closed or merged along the way.
SPIVA’s method includes funds that existed at the start but later merged or liquidated in the comparison if they underperformed or disappeared. It reports fund returns net of fund fees but excludes sales loads, while its benchmark index has no costs. Index funds, leveraged funds, and inverse funds are excluded from the active-fund count. S&P also counts one share class per fund, using the larger class. Those choices help explain why scorecard percentages should be read as a specific comparison, not as a universal probability for every investor.
Returns tell another part of the story. For the 20 years through June 30, 2026, a secondary reading of SPIVA data reports annualized S&P 500 returns of 11.39%, against 10.33% for asset-weighted large-cap active funds and 9.47% for equal-weighted funds. Compounding those rates on $10,000 produces approximately $86,482, $71,429, and $61,080, respectively. Those dollar totals are calculations from the cited annualized returns, not amounts printed by S&P; the index return has no expenses, so a real index fund would be slightly lower. Asset-weighted active returns were better than equal-weighted returns, but they still trailed the index. The scorecard transcription and related calculations are discussed by the Retirement Literacy Foundation’s SPIVA summary.
Why do most active funds underperform?
Two factors matter: the market arithmetic leaves active investors collectively holding the market before costs, and active management generally costs more. When all active investors are considered together, one investor’s overweight in a security is another investor’s underweight; as a group, active investors hold the market. After research, trading, and fund expenses, their average net result is lower than the market’s return.
Economist William F. Sharpe explained this in “The Arithmetic of Active Management”: before costs, the average actively managed dollar must earn the same as the average passively managed dollar; after costs, the active dollar earns less. This accounting identity does not rule out outperformance by individual managers. It means the winners must be a minority of active dollars, and identifying those winners in advance is a separate challenge. Read the Sharpe paper for the argument.
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For 2025, ICI reported asset-weighted average expense ratios of 0.64% for actively managed equity mutual funds and 0.05% for index equity mutual funds—a difference of 0.59 percentage points each year before trading costs inside the funds. The figures are averages, not quotes for specific funds. ICI’s asset-weighted average for all equity mutual funds was 0.40% in 2025, down from 0.99% in 2000; its simple average was higher, at 1.09%, because the simple average gives a small fund the same weight as a large one.
| Year | Actively managed | Index |
|---|---|---|
| 2000 | 1.06% | 0.27% |
| 2010 | 0.96% | 0.16% |
| 2020 | 0.71% | 0.06% |
| 2025 | 0.64% | 0.05% |
Costs vary widely even within a fund type. In 2025, the lowest-cost quartile of equity mutual funds held 82% of equity mutual fund assets; the lowest-cost quartile of index equity funds held 85% of index assets, and the lowest-cost quartile of active funds held 73% of active assets. Among growth-focused equity mutual funds, 10% charged 0.60% or less, while another 10% charged 1.75% or more. The expense ratio is not the whole cost: advisory fees paid outside the fund, sales loads, and investor-level taxes are not included in these ICI averages. A low-cost fund held through an expensive advice arrangement may still come with substantial total costs.
ICI’s figures concern mutual funds and exclude funds available only as investment choices inside variable annuities. They are not direct estimates of an individual investor’s total costs. Check the current prospectus for a specific share class: the averages above are not a substitute for its current fee schedule.
Can you pick the active funds that will win?
Past outperformance has not been a dependable shortcut to choosing future winners. In S&P’s Year-End 2025 Persistence Scorecard, 29% of top-quartile large-cap funds from 2023 remained top-quartile for the following two years. That was better than the 0% reported in the prior year’s scorecard, but it still means most did not keep their top-quartile rank.
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A free scan shows the junk files, broken settings and background clutter dragging Windows down - then fixes them in one click.Free scan · Windows 10 & 11Longer tests were less encouraging. Of the top-quartile active domestic equity funds from 2021, none in the reported categories except small-cap funds remained top-quartile through 2025. Only 4.5% of above-median large-cap funds from 2021 stayed above the median, compared with a 6.25% rate expected under random chance. For small-cap funds, 17% of top-quartile funds retained that standing over the next two years, but only 2% remained top-quartile over five years. A recent high ranking may reflect a run of favorable style or market conditions rather than a repeatable edge.
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There is a serious debate about exactly how pessimistic fund-count comparisons should look. A 2026 paper by Martijn Cremers, Jon Fulkerson, and Timothy Riley proposed comparing active funds with real index funds, weighting by assets rather than equally, and giving closed funds credit if they had been ahead before closing. As summarized by Morningstar, the authors found that 55% of US equity assets underperformed over a 20-year period, rather than the 92% of funds in the corresponding broad SPIVA comparison. That is much closer to a coin flip: dollars are more likely than individual funds to be in larger funds, which did better on average.
The adjusted result is a worthwhile qualification, not proof that active management is the better default. Morningstar reports that for the 10 years ending December 31, 2024, the authors’ adjusted approach still found 63% of active US equity funds lagged. And the asset-weighted large-cap active returns in the 20-year SPIVA reading above still trailed the costless benchmark by about a percentage point a year. The fairest summary is that fund-count odds look worse than dollar-weighted odds, but neither makes it easy to know in advance which active manager will outperform.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Is active management better for bonds or small caps?
Sometimes active managers have fared better in particular categories or shorter periods, but those exceptions do not overturn the long-run pattern. They are a reason to compare like with like and to avoid turning a favorable short stretch into a blanket claim about an entire asset class.
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Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Repair Windows errors before they cause bigger problemsFix Now →Scan for outdated or missing drivers - takes under a minuteDriver Scan →In the first half of 2026, the S&P 500 gained 10%, while the S&P MidCap 400 rose 17% and the S&P SmallCap 600 rose 24%, according to S&P. In that broader-market environment, 67% of active large-cap funds, 74% of mid-cap funds, and 69% of small-cap funds underperformed. Among US-domiciled funds, 49% of international funds and 53% of global funds underperformed; for emerging-markets funds, the rate was 38%. Bond results were better over that half-year: the cross-category average underperformance rate was 38%, compared with 60% across equities. These are first-half results, not full-year or long-term rates. The SPIVA U.S. Mid-Year 2026 scorecard distinguishes those horizons.
Longer windows can reverse the short-term impression. For small-cap funds through June 30, 2026, 55.58% underperformed over five years, but 91.12% trailed over 15 years and 91.16% over 20 years. Large-cap value was an unusual short-run exception: 45.80% underperformed over one year and 41.09% over three years, meaning a majority beat the matched value benchmark in those periods. Yet 82.29% trailed over 10 years and 92.19% over 15 years. Calendar-year 2025 small-cap funds also had a favorable year relative to their benchmark: 40.7% underperformed, while 90.3% trailed over 20 years ending that December.
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In the first half of 2026, the average underperformance result for bond categories was better than for equities, but it does not establish that active bond funds are reliably superior. S&P’s institutional scorecard, which includes institutional accounts and separately managed or wrap accounts as well as mutual funds, found that after fees at least 80% of equity funds and at least 50% of fixed-income funds underperformed over the 10 years ending December 31, 2025. Institutional results and mutual-fund results are not interchangeable, but the longer-horizon evidence still argues against assuming bonds are an automatic active-management exception.
How should you build a diversified portfolio with mutual funds?
Choose the asset allocation first; then decide which fund type will fill each role. Active-versus-index evidence does not tell you how much to hold in stocks versus bonds, nor does it determine the right mix for your time horizon, risk tolerance, or financial goals.
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- Decide what the portfolio needs to hold. A diversified long-term core commonly includes broad exposure to domestic stocks, international stocks, and investment-grade bonds. A target-date or balanced fund can package a mix, but its allocation still needs to fit the investor.
- Use broad, low-cost funds for core exposures. An S&P 500 index fund can cover US large-cap stocks, but it is not a global portfolio. Pairing country or regional exposures can reduce reliance on a single market, although it does not eliminate investment risk.
- Check whether each fund adds a different exposure. Five active large-cap funds may own many of the same companies and remain concentrated in one market. Adding funds is not the same as diversifying.
- Compare costs on the same basis. Check the current prospectus’s expense ratio, any sales charge, and advice fees paid outside the fund. Compare funds that serve the same role rather than choosing solely by last year’s return.
- Treat active funds as deliberate satellites. If you choose one, identify the job it is meant to do, use a benchmark suited to its style, assess its cost and investment mandate, and keep its position sized so a poor outcome cannot dominate the overall portfolio.
- Review the plan, not just the leaderboard. Revisit whether the allocation still suits your needs and whether each holding still serves its role. Frequent changes in response to short-term rankings can turn a long-term plan into a series of performance-chasing decisions.
Active funds may trade more, which can create taxable distributions in a taxable account; the scorecards do not calculate an investor’s tax bill or quantify a typical tax drag. In retirement accounts, tax differences may be muted, but fund expenses remain. An adviser’s asset-based fee is also separate from the fund’s expense ratio. Keep those costs and account details in view when comparing real-world outcomes.
The conclusion is not that skill is impossible or that every index is broadly diversified. It is that a low-cost, globally diversified index-fund mix is a sensible default core, while active funds need to earn their place through a specific purpose, reasonable cost, and a level of risk the investor can accept. For a longer explanation of the low-cost market-ownership argument, John C. Bogle’s The Little Book of Common Sense Investing is a book, not a mutual fund or a portfolio implementation.
Frequently Asked Questions
Are index mutual funds safer than actively managed funds?
No fund type is inherently safe: an index fund can lose value when its market falls, and an active fund can take more or less risk depending on its mandate and holdings. Diversification, asset allocation, and the risks of the underlying investments matter more to potential losses than the active or index label alone.
Can I hold active and index mutual funds in the same portfolio?
Yes. Investors can use index funds for broad exposures and add an active fund for a specific strategy, while checking for overlapping holdings and keeping total costs in view. The mix should still fit the investor’s goals and risk tolerance.
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Does an index mutual fund always match its index exactly?
No. The fund’s expenses and tracking differences can make its return differ from the index it follows. The index itself has no fund expenses, so it is a benchmark rather than an investable result at zero cost.
Are index mutual funds and index ETFs the same thing?
No. Both can track indexes, but mutual funds and exchange-traded funds are different investment vehicles with differences in trading and potentially in taxes or how advice is paid. The performance comparisons in this article concern mutual funds.
