index funds aim to mirror the performance of benchmarks like the s p 500 by mimicking their makeup these passive investments long considered an unimaginative way to invest are behind a quiet revolution in u s equity markets as they seize the attention and dollars of a widening swath of investors the numbers tell the story passive index funds tracking market benchmarks accounted for just 21 of the u s equity fund market in 2012 1 by 2023 passive funds had crossed above 50 of assets beating their actively traded peers 2
the seismic shift has come as index funds have convincingly outperformed their active fund peers 32 according to the widely followed s p indices versus active spiva scorecards about 9 out of 10 actively managed funds didn t match the returns of the s p 500 benchmark over the previous 15 years 3 rather than having some unique stock picking wizardry critics argue that managers of actively traded funds have only demonstrated a magical power for extracting higher fees for themselves while returning less to clients whatever the outcome of these debates over fund performance for many who once put their faith in what those fees in actively managed funds bought the spell has clearly been broken to see why below we unpack what index funds are and how they work we ll discuss the benefits and drawbacks of building a portfolio with index funds along the way investopedia madelyn goodnight