Investing in market-tracking index mutual funds, known as passive investing, gets brandished as boring.
But the truth is in the returns: Index funds routinely clobber funds actively managed by professional stock pickers.
Last year was no exception, according to a new BofA Global Research report. Funds run by the pros had a heck of a time beating the returns of passive indexes that track US large-cap equities.
Just 36% of actively managed US large-cap mutual funds, for example, delivered bigger gains than their Russell 1000 index benchmarks in 2024.
The Russell 1000, an equities index that provides exposure to companies such as Apple, Nvidia, Microsoft, Amazon, and Facebook parent Meta, had lots of oomph behind it with these hot tech stocks, to be fair.
But it’s no fluke. Among over 1,900 US equity mutual funds and ETFs tracked by Morningstar, 19% beat the S&P 500, which had a 25% return, and only 37% beat their category index in 2024.
For two decades, S&P Dow Jones Indices has been producing “scorecards” that compare the performance of actively managed equity and fixed-income mutual funds with various indexes over different time spans. In the last three years, for instance, 86% of actively managed funds couldn’t match the S&P 500. Over a 10-year period, 85% of these funds underperformed the S&P 500, according to the data.
One superstar admirer of low-fee index funds is Warren Buffett.
“In my view, for most people, the best thing to do is to own the S&P 500 index fund,” Buffett said at a Berkshire Hathaway annual shareholders meeting a few years ago.
“People will try and sell you other things because there’s more money in it for them if they do. And I’m not saying that that’s a conscious act on their part. Most good salespeople believe their own baloney…that’s why I suggest to people they buy an index fund.”
