Index Funds vs Active Funds: 98% Lost to Their Index

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:

Ten years, euro-denominated funds

Share of active funds that lost to their own benchmark

Global Equity vs S&P World 98.44%

U.S. Equity vs S&P 500 98.22%

Eurozone Equity vs S&P Eurozone BMI 97.89%

Europe Equity vs S&P Europe 350 97.02%

Emerging Markets Equity vs S&P Emerging Plus 90.88%

Four of these bars are effectively the same bar. The fifth is not, and the eight-point gap at the bottom is the only genuinely useful information on the chart.

Emerging markets are still a bad bet for the average active fund. They are just a less bad one, and the reason is structural rather than lucky: thinner analyst coverage, wider dispersion between winners and losers, and more room for research to find something the price does not already know.

The rest of the table reads the same way. Against the S&P 500, 98.22% of euro-denominated US equity funds underperformed over the ten years. Against the S&P Eurozone BMI, 97.89%. Against the S&P Europe 350, 97.02%. 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, and 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.

The part of this that is not a finding at all

Here is what changed my own thinking about active management, and it has nothing to do with SPIVA.

Every study above is empirical. It observes what happened, over a particular decade, in particular markets, and every empirical finding invites the same rebuttal: different decade, different market, different manager. Fund salespeople have made careers out of that rebuttal, and it is not a stupid one.

But in 1991, before most of this data existed, William Sharpe published three pages in the Financial Analysts Journal that make the rebuttal impossible. The paper is called “The Arithmetic of Active Management” and it contains no data whatsoever. It is a proof.

The argument runs like this. Take every share in a market and split the owners into two groups — those holding the market in proportion, and everyone else. The first group, by construction, earns the market return. The market return is the weighted average of what all owners earned. So whatever is left over, held by everyone else, must also average out to the market return. There is nothing else it could average out to.

Sharpe’s two sentences are worth reading slowly:

“before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar”

“after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar”

Notice what is missing. No assumption that markets are efficient. No assumption that managers are unskilled. No dataset, no period, no benchmark choice to argue about. The result holds in a wildly irrational market and in a perfectly rational one, in 1991 and in 2026, in equities and in anything else that can be owned.

Active management as a whole is not losing because it is bad at its job. It is losing because it is trying to be above average at a game where the average is defined as what everybody collectively did, and then paying research and trading costs for the attempt.

That reframes every number in this article. SPIVA is not evidence that active managers underperform. It is a measurement of by how much, and of how the shortfall is distributed. And Sharpe, to his credit, is precise about what his arithmetic does not say: it does not say your manager cannot win. Some do. It says that for every euro your manager wins, another active euro somewhere lost it, and both of them paid a fee for the privilege of finding out which.

He also names, in passing, the exact trick from the previous section. The reason empirical studies sometimes appear to contradict the arithmetic, he writes, is measurement failure: survivorship bias, improper weighting, and funds called passive that are not. He was describing the fund brochure thirty-five years before you were handed one.

So the question worth asking is not whether active management works. The arithmetic settled that. The question is whether this fund, in this market, has a structural reason to be one of the winners, and that is a much harder question with a much shorter list of acceptable answers.

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.

Now do the division fund marketing never does. A fund charging 1.1% with an active share of 0.60 is charging that fee on the three fifths of the portfolio that differ from the index, which prices the active part at 1.83% a year. Drop the active share to 40% and the same 1.1% fee becomes 2.75% on the only part you were paying for.

The division nobody performs

What you actually pay for the active part

Every fund below charges the same 1.1%. The only difference is how much of the portfolio differs from the index — because the index portion is something you could have bought for a tenth of the price, and it will deliver the index return whatever you paid.

Active share What that means Real price

90% Genuinely active 1.22%

75% Active with a benchmark eye 1.47%

60% The industry’s own warning line 1.83%

40% An index fund wearing a costume 2.75%

The bottom row is a fund charging 1.1% and delivering 40% of a portfolio you could not have replicated yourself. On that portion you are paying 2.75%. Ferrari price, Golf engine.

Active share is published, though rarely prominently: fund factsheets, KIIDs and independent databases carry it. Pair it with tracking error. Low active share together with low tracking error is the signature of a manager hugging the benchmark, and it is the cheapest thing in the world to detect once you know the two numbers to ask for.

The other portion 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.

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 chart. 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.

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

There is one more layer, 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. 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. That is not a controversial statement in an institutional investment committee. It is the default assumption. The core of a liquid institutional portfolio, meaning large-cap equity and 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.