Explainers / Investing
What is an index fund?
Over 15 years, 90% of professionally picked funds investing in large US companies did worse than the S&P 500. Here is why picking winners is so hard.
By Kinza Updated 29 September 2026 3 min read
What an index fund is
An index is a list of companies, like the FTSE 100 or the S&P 500. An index fund is one investment that buys a tiny slice of every company on the list, in proportion to their size. You are not betting on any one company. You are betting on the list as a whole.
A fund run by a professional stock-picker, called an active fund, tries to do better than an index by choosing which companies to buy.
What the evidence says
S&P Dow Jones Indices has measured active funds against their index for over 20 years in its SPIVA reports. In the 15 years to 30 June 2026, 90.49% of actively managed funds investing in large US companies did worse than the S&P 500.
In the UK, the Financial Conduct Authority studied the fund industry in 2017. It found that, on average, both active funds and index funds did not beat their own benchmarks after fees, and that it is difficult for investors to spot in advance which funds will do better.
Why picking tends to lose
Arithmetic. Every share is owned by somebody. Before costs, investors as a whole earn exactly the market’s return, because together they are the market. So for every stock-picker who beats the index before costs, another must fall behind it. Then costs are taken off.
Costs. The FCA found that many active funds held much the same investments as cheaper index funds, but some charged significantly more for them. A fee is paid every year, whether the fund wins or loses.
Spotting the winners. Past winners are hard to pick out in advance. The FCA’s report notes that academic research finds little evidence that funds which beat the market keep on beating it.
What this does not mean
It does not mean shares are safe: an index fund falls when the market falls. It does not mean nobody ever beats the market, only that it is hard to tell in advance who will. And it is education, not advice. You have to be 18 to open an ISA, the tax-free account for saving and investing, so for now the useful thing is to understand the argument.
The analyst habit
When someone tells you about a fund that has beaten the market, ask two questions. Over how long? And after fees?