Every year, financial publications produce headlines about which mutual fund manager "beat the market" — and every year, a new set of names appears, because last year\u2019s winners rarely repeat. This is not a coincidence. It reflects one of the most well-documented findings in investment research: over long periods, the majority of actively managed funds underperform their benchmark index, after fees.
Index investing means holding a fund (typically an ETF, or exchange-traded fund) that simply tracks a market index — such as the S&P 500 or the broader Canadian market — rather than paying a manager to try to pick winning stocks and avoid losers.
The Evidence
Independent studies that track active fund performance against benchmark indexes — conducted regularly across multiple countries and time periods — consistently find that the majority of actively managed equity funds underperform their benchmark over 10, 15, and 20-year periods, after fees. The percentage of underperforming funds tends to increase the longer the time period measured.
This does not mean no active manager ever outperforms — some do, in some years. The challenge is twofold: identifying in advance which managers will outperform (rather than after the fact, when it is too late), and the fact that outperformance in one period is a poor predictor of outperformance in the next.
Why Active Management Struggles to Outperform
The Fee Drag
Actively managed funds charge higher fees than index funds — the management expense ratio (MER) for active Canadian equity funds often runs 1.5–2.5%, compared to 0.05–0.25% for many broad-market index ETFs. A manager needs to outperform the index by more than this fee differential just to match index returns net of fees — a high bar to clear consistently.
Markets Are Efficient (Mostly)
Modern markets process information rapidly — company news, economic data, and analyst views are quickly reflected in stock prices by the collective activity of millions of market participants. This makes it difficult for any individual manager to consistently identify mispriced securities before the market does, particularly in large, well-covered markets like US and Canadian large-cap equities.
Survivorship and Selection Effects
When a fund underperforms badly enough, it is often merged into another fund or closed — removing it from the historical record. This means the funds that remain visible over long periods are disproportionately the ones that survived, which can make average active fund performance look better than it actually was for the typical investor over time.
What Index Investing Actually Looks Like
A low-cost index portfolio typically consists of a small number of broad-market ETFs — for example, a Canadian equity index ETF, a US equity index ETF, an international developed markets index ETF, and a bond index ETF — combined in proportions matching your target asset allocation.
"All-in-one" asset allocation ETFs have also become popular in Canada — a single ETF that holds a globally diversified mix of stocks and bonds in a fixed ratio (for example, 60% equity / 40% bonds), automatically rebalanced. These can simplify a portfolio to a single holding while maintaining broad diversification and low costs.
The Cost Comparison
| Fund Type | Typical MER | What You\u2019re Paying For |
|---|---|---|
| Actively managed Canadian equity mutual fund | 1.8–2.5% | Manager research, stock selection, trading, distribution/trailer fees |
| Broad-market index ETF | 0.05–0.25% | Tracking the index, minimal trading, no manager selection costs |
| All-in-one asset allocation ETF | 0.20–0.25% | Diversified index exposure across asset classes, automatic rebalancing |
Index Investing Is Not "No Strategy"
A common misconception is that index investing means having no investment strategy — simply buying "the market" and hoping for the best. In practice, index investing shifts the strategic decisions to where they arguably matter most: asset allocation (how much in equities vs. bonds, and across which geographies), account placement (which investments go in RRSPs vs. TFSAs vs. non-registered accounts), and behaviour (staying invested through volatility, rebalancing systematically, and avoiding emotional decisions).
These decisions — not stock-picking — are where a financial planner adds the most value for most investors. Index investing removes the (often costly, often unsuccessful) attempt to beat the market, freeing up attention for the decisions that have a more reliable impact on outcomes.
When Active Management Might Still Make Sense
Index investing is most clearly advantageous in highly efficient, well-covered markets — large-cap US and Canadian equities, for example. Some argue that less efficient markets — certain emerging markets, small-cap stocks, or specialized fixed income — may offer more opportunity for skilled active managers, though even in these areas, the evidence for consistent outperformance after fees remains mixed.
For most individual investors building a core long-term portfolio, a predominantly index-based approach — combined with thoughtful asset allocation, tax-efficient account placement, and disciplined rebalancing — represents a well-supported, evidence-based starting point.
The question worth asking is not "can someone beat the market?" — clearly, some funds do, in some periods. The more useful question is: "what is the probability that I can identify, in advance, which fund will be one of the winners over the next 20 years — and is that probability high enough to justify paying 1.5–2% more per year for the attempt?" For most investors, the evidence suggests the answer is no.
Are You Getting the Most From Your Money?
Free Financial Planning Readiness Checklist designed for engineers, oil patch workers, and high achievers.
Download Free Checklist →