Index Funds Superior Performance

Given the high turnover (trading of stocks) found within actively (non index) managed mutual fund, it is estimated that index funds automatically enjoy a 1% annual lead over active funds. The costs incurred by active managers in trading so frequently, allow index funds to build up a sizeable head start, before the annual performance races even begin.

As the neighboring charts indicate, index funds continue to outperform upwards of 80% of the professional portfolio managers who continue to try and time the market. Only 18% of actively managed mutual funds in the UK outperformed the FTSE 100 index over the past 10 years (December 31, 2000). Only 11% of active funds in the US beat the S&P 500 Index, over the same 10 year period.

The key to the successful performance of index funds, is their ability to stay out of the bottom one third of all mutual funds performance. Between 1963 and 2000, the S&P 500 index funds only appeared in the bottom one third of unit trust performances, four times. This equates to one in ten years. Who would not be happy with a fund like this?

Over the long-term, indexing offers relative predictability. A fund's performance should mirror that of its target index, minus operating expenses.

Indexing should not be thought of as a "hot" or short-term investment strategy. Indexing gains its advantage
over the long-term. Indexing's main appeal, is therefore not to investors who expect to make a "killing." Instead, the strategy is designed for long-term investors who seek a very competitive long-term investment return through broadly diversified portfolios.