Index Funds vs Active Funds: What the Data Actually Says

Imagine a casino where the pit boss tells you, honestly and upfront, that 98% of players walk out with less than they came in with.

You would leave.

Now consider the following, which is not a hypothetical:

Over the ten years to the end of 2025, 98.44% of euro-denominated global equity funds failed to beat the S&P World index.

People queue up to buy those. And pay a premium for the privilege.

The number, and where it comes from

This is not a blogger cherry-picking a window. It is SPIVA — S&P Dow Jones Indices’ own scorecard, published twice a year, measuring active funds against the benchmarks S&P itself owns.

From the SPIVA Europe Scorecard, Year-End 2025, Report 1a:

Euro-denominated fund category	Benchmark	Underperformed over 10 years
Global Equity	S&P World	98.44%
U.S. Equity	S&P 500	98.22%
Europe Equity	S&P Europe 350	97.02%
Eurozone Equity	S&P Eurozone BMI	97.89%
Emerging Markets Equity	S&P Emerging Plus	90.88%

And on a risk-adjusted basis — which is the fairer test, because it asks whether the manager earned their excess return or simply took more risk — global equity underperformance rises to 99.17%.

Out of every hundred global equity funds sold to European investors, fewer than two beat a cheap index over a decade.

These people have research teams, Bloomberg terminals, direct access to management, and every informational advantage money can buy.

Most of them lose to the average.

First, why the marketing charts look nothing like this

Before the reasons, the trick — because it explains why you have probably never seen these numbers.

When a fund performs badly, it does not stay around to embarrass anyone. It is liquidated, or merged into a better-performing sibling. And it vanishes from the performance tables.

What you are shown in a brochure is the survivors.

SPIVA closes this door deliberately: to count as an outperformer, a fund must survive the entire period. Funds that were killed off during it are not quietly dropped — they are counted as the failures they were.

That single methodological choice is most of the reason SPIVA’s numbers are so much uglier than a fund family’s own material.

If a performance chart is not explicitly labelled “survivorship corrected”, it is not telling you what you think it is telling you.

The cemetery is larger than the city. You are only ever given a tour of the city.

Reason one: you are paying for parsley

Imagine paying €100 for a chef-prepared risotto, while in the kitchen someone is microwaving a €5 ready meal and adding a sprig of parsley.

That is closet indexing, and it is widespread.

The metric that catches it is active share — the percentage of the portfolio that actually differs from the benchmark.

Below roughly 60%, the fund is substantially an index fund with a markup.

And now do the arithmetic that fund marketing never does. Divide the fee by the active share:

A fund charging 1.1% with an active share of 60% → you are paying 1.83% on the portion that is genuinely active → 1.1% ÷ 0.60 = 1.83%

Ferrari price. Golf engine.

The other 40% of your portfolio is the index — which you could have bought for a tenth of that, and which is going to deliver exactly the index return either way.

Professional due diligence pairs active share with tracking error — how far the fund’s return path wanders from the index. Low active share and low tracking error is the signature. The manager is hugging the benchmark so tightly that your return is, in substance, an ETF’s return with a larger fee subtracted.

Why would anyone manage money like that?

Career risk. And from where the manager sits, it is entirely rational.

A manager who tracks the index and loses 15% in a bad year keeps their job — everybody lost 15%.

A manager who deviates and loses 25% is fired, even if the strategy was correct and would have worked handsomely over a decade.

It is safer to fail conventionally than to risk succeeding unconventionally.

Their incentive is to keep the job. Yours is to compound. Those objectives look similar and are not.

Reason two: most of them are fighting in a market where nobody can win

If you are buying US large-cap equity, your manager is bringing a knife to a gunfight against algorithms.

That market is the most analysed, most surveilled, most instantly-repriced pool of capital in human history. Information is absorbed in milliseconds. The probability that a human, however clever, systematically extracts an edge there — after fees — is close to zero, and the data says so.

But look again at the table. Emerging markets equity: 90.88% underperformance over ten years.

Still terrible. But eight percentage points better — and that difference is not noise. It is what happens when a market is less efficient, information is scarcer, and there are genuine cracks for research to work in.

The lesson is not that active management can never work. It is that it can only work where inefficiency exists — and the places most active funds are sold are precisely the places it does not.

If your manager is fighting in a perfect market, they have already lost. The fee simply confirms it.

Reason three: you are not being sold the same fund the professionals buy

There is one more layer, and it is rarely discussed in public.

The same portfolio, run by the same manager, is frequently sold at two different prices — a cheaper institutional share class, and a more expensive retail one.

The gap does not buy better research. It does not buy a better manager. It funds the distribution machine: the marketing, the platform fees, the sales apparatus that put the fund in front of you.

So before your manager has beaten anything, you are already carrying a hurdle the institutional buyer of the identical fund is not.

Add a fee, add a distribution markup, add an active share of 60%, and place all of it in the most efficient market on earth.

The arithmetic was settled before the manager made a single decision. This is the same misalignment that decides what your bank recommends to you in the first place.

If you still want to pay for active — do it properly

Because there are real managers, in real markets, earning real fees. They are just rare, and you do not find them by looking at last year’s winners. SPIVA’s persistence work is blunt on that: past outperformance barely repeats.

So look at structure, not at returns.

1. Skin in the game. Does the manager have significant personal money in their own fund? A manager with none is protecting a career. A manager with real wealth at risk is protecting the same thing you are.

If the cook won’t eat their own stew, don’t order it.

2. Active share high enough to justify the fee. If you are paying active prices, insist on receiving an active portfolio. Divide the fee by the active share and look at the number that comes out.

3. A market where an edge can exist at all. Small caps. Distressed debt. Frontier markets. Places where dispersion is wide, coverage is thin, and avoiding the disasters is itself a source of return. Not US mega-caps.

The verdict

Active management in efficient markets is, on the evidence, a broken product.

This is not a controversial statement in an institutional investment committee. It is the default assumption. The core of a liquid institutional portfolio — large-cap equity, investment-grade credit — is indexed, and active risk is spent deliberately, in the few places it can plausibly pay.

Your real levers are asset allocation, cost, and tax. Not the search for a star manager.

And if you do go hunting for one, use a microscope rather than a telescope: audit the fee, check the active share, demand skin in the game — and be honest about whether the market you are hunting in has any prey left in it.

Educational content only — not investment advice, and not a personal recommendation. Speak to a qualified, licensed professional before acting.