{"slug":"index-fund-vs-active-fund)","title":"Index Fund vs Active Fund","url":"https://www.aversusb.net/compare/index-fund-vs-active-fund)","faqCount":5,"faqs":[{"question":"Why do most active funds underperform index funds?","answer":"Active funds underperform primarily due to high expense ratios and trading costs that exceed any outperformance from security selection. Studies show that over 15 years, 85-90% of active equity funds underperform the S&P 500 after fees. Even skilled managers struggle to overcome the 0.75-2.00% annual fee burden. Additionally, taxes from high portfolio turnover create a 2-3% annual drag on returns."},{"question":"Can I ever beat the market with an active fund?","answer":"Yes, but rarely and unpredictably. Approximately 10-15% of active funds beat their benchmark over 10-15 year periods after fees. However, past performance does not predict future results—studies show only 25-30% of top-performing funds maintain outperformance over consecutive 5-year periods. Identifying future winners before they win is extremely difficult, making the odds heavily against the investor."},{"question":"What's the tax difference between index and active funds?","answer":"Index funds create approximately 0.5-1.0% annual tax drag due to minimal trading (turnover ~5-10%), while active funds create 2.0-3.0% annual tax drag from frequent trading (turnover 50-100%+). In a taxable account, this tax inefficiency compounds significantly over decades, further widening the performance gap in favor of index funds."},{"question":"Should I use active funds for downside protection?","answer":"Active funds do not reliably provide downside protection. During the 2020 COVID crash, the median active equity fund fell 25-30%, similar to the S&P 500. During the 2008 financial crisis, active funds fell 37% vs. the S&P 500's 37%, showing no meaningful protection. Market-timing and hedging strategies used by active managers rarely work consistently."},{"question":"Is there any scenario where active funds make sense?","answer":"Active funds may be justified in specialized areas where information inefficiency exists, such as emerging markets, small-cap stocks, or bonds, where pricing is less efficient and skilled managers can add value. Additionally, if you have access to a fund manager with a verified 10+ year track record of outperformance (and low fees under 0.50%), it may be worth considering. However, for broad US stock market exposure, index funds are superior for 95%+ of investors."}],"faqPageSchema":{"@context":"https://schema.org","@type":"FAQPage","@id":"https://www.aversusb.net/compare/index-fund-vs-active-fund)#faq","url":"https://www.aversusb.net/compare/index-fund-vs-active-fund)","inLanguage":"en-US","name":"Index Fund vs Active Fund — FAQ","description":"Frequently asked questions about Index Fund vs Active Fund","dateModified":"2026-07-07T12:53:02.195Z","author":{"@type":"Organization","@id":"https://www.aversusb.net/#organization","name":"A Versus B"},"publisher":{"@type":"Organization","@id":"https://www.aversusb.net/#organization","name":"A Versus B"},"isPartOf":{"@type":"Article","@id":"https://www.aversusb.net/compare/index-fund-vs-active-fund)#article"},"license":"https://creativecommons.org/licenses/by/4.0/","speakable":{"@type":"SpeakableSpecification","cssSelector":["#faq",".faq-item"]},"mainEntity":[{"@type":"Question","name":"Why do most active funds underperform index funds?","acceptedAnswer":{"@type":"Answer","text":"Active funds underperform primarily due to high expense ratios and trading costs that exceed any outperformance from security selection. Studies show that over 15 years, 85-90% of active equity funds underperform the S&P 500 after fees. Even skilled managers struggle to overcome the 0.75-2.00% annual fee burden. Additionally, taxes from high portfolio turnover create a 2-3% annual drag on returns.","inLanguage":"en-US","url":"https://www.aversusb.net/compare/index-fund-vs-active-fund)"}},{"@type":"Question","name":"Can I ever beat the market with an active fund?","acceptedAnswer":{"@type":"Answer","text":"Yes, but rarely and unpredictably. Approximately 10-15% of active funds beat their benchmark over 10-15 year periods after fees. However, past performance does not predict future results—studies show only 25-30% of top-performing funds maintain outperformance over consecutive 5-year periods. Identifying future winners before they win is extremely difficult, making the odds heavily against the investor.","inLanguage":"en-US","url":"https://www.aversusb.net/compare/index-fund-vs-active-fund)"}},{"@type":"Question","name":"What's the tax difference between index and active funds?","acceptedAnswer":{"@type":"Answer","text":"Index funds create approximately 0.5-1.0% annual tax drag due to minimal trading (turnover ~5-10%), while active funds create 2.0-3.0% annual tax drag from frequent trading (turnover 50-100%+). In a taxable account, this tax inefficiency compounds significantly over decades, further widening the performance gap in favor of index funds.","inLanguage":"en-US","url":"https://www.aversusb.net/compare/index-fund-vs-active-fund)"}},{"@type":"Question","name":"Should I use active funds for downside protection?","acceptedAnswer":{"@type":"Answer","text":"Active funds do not reliably provide downside protection. During the 2020 COVID crash, the median active equity fund fell 25-30%, similar to the S&P 500. During the 2008 financial crisis, active funds fell 37% vs. the S&P 500's 37%, showing no meaningful protection. Market-timing and hedging strategies used by active managers rarely work consistently.","inLanguage":"en-US","url":"https://www.aversusb.net/compare/index-fund-vs-active-fund)"}},{"@type":"Question","name":"Is there any scenario where active funds make sense?","acceptedAnswer":{"@type":"Answer","text":"Active funds may be justified in specialized areas where information inefficiency exists, such as emerging markets, small-cap stocks, or bonds, where pricing is less efficient and skilled managers can add value. Additionally, if you have access to a fund manager with a verified 10+ year track record of outperformance (and low fees under 0.50%), it may be worth considering. However, for broad US stock market exposure, index funds are superior for 95%+ of investors.","inLanguage":"en-US","url":"https://www.aversusb.net/compare/index-fund-vs-active-fund)"}}]}}