Many people believe that passive investment (say buying into an ETF) typically outperforms actively managed funds because the latter induce more fees.

Are there any (solid) empirical studies investigating this?

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    Yes, just decide whether you'd like the study to favor active or passive investment; there's plenty of studies supporting each.
    – Sneftel
    Feb 16, 2023 at 12:20
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    @Sneftel Great, I am happy to read studies supporting both points, as long as they are executed well.
    – Peter
    Feb 16, 2023 at 12:53
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    The SPIVA report is published annually. spglobal.com/spdji/en/research-insights/spiva Click "View more fund categories" to view more than just the S&P500. Data is pretty compelling.
    – dberm22
    Feb 16, 2023 at 21:14
  • If you have a "fund" that beats the market consistently, the last thing you want is tons of people buying said fund. The market will adjust and lower your returns. See question on Why aren’t there more stock market prediction tools available?
    – Nelson
    Feb 17, 2023 at 2:39
  • It's kind of hard to study the two separately, since the market is affected by both all the time.
    – user26460
    Feb 18, 2023 at 17:18

2 Answers 2


There is an interesting paper by Hendrik Bessembinder, Francis J. and Mary B. Labriola from ASU’s W. P. Carey School of Business which shows that

the largest returns come from very few stocks overall — just 86 stocks have accounted for $16 trillion in wealth creation, half of the stock market total, over the past 90 years. All of the wealth creation can be attributed to the thousand top-performing stocks, while the remaining 96 percent of stocks collectively matched one-month T-bills.

Insofar, what really matters is that you diversify - that way you will surely get the (future) winners. If you try to cherry pick, you will almost surely not be able to beat the average market in the long run and end up with less return. Below is a screenshot from the SPIVA Report which shows that the performance of active investment managers is generally very poor. The report contains a lot more data for all sorts of countries and funds. The numbers will always be very similar and show that very few funds actually beat the market in the long run.

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I am not aware of (m)any (well done) studies that show a different answer. There are some notable exceptions like Renaissance Technologies Medallion fund - but that fund is closed, and the hedge funds public funds have a very different (worse) return.

You may think that the asset managers in the SPIVA data are not the best fund managers and that hedge funds are obviously beating the S&P500. Well, Credit Suisse has plenty of data on that, and their broadest measure, the Credit Suisse Hedge Fund Index looks like this (I am also showing a second index showing the performance of hedge funds following long/short equity strategies):

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Overall, I wish you good luck finding (hedge) funds that outperform the S&P500 in the long run (a few years). By design, the return of passive investment should equal the market return. The average return across all active investors must also equal the market return - any gains of some managers must be offset by the losses of others. So inevitably, after taking the higher trading costs into account, the average return for active investors must be less than for passive ones. Obviously, with the benefit of hindsight, one could say I just should have invested in fund x or y, but fund picking is akin to finding the right stocks in the first place. Also, as written at spglobal: The Active vs Passive debate,

... it is challenging for managers to consistently remain at the top of their categories, especially over longer horizons... top-performing active funds have little chance of repeating that success in subsequent years.

Some articles:

Active equity UCITS have underperformed on average, in net terms, passive and ETF equity UCITS as well as their prospectus benchmarks

Why Active management will / should stay:

There is evidence that fund managers do better during market turmoil e.g. Do Active Funds Perform Better In Down Markets?, usually a result of fund managers moving to defensive positions such as cash or government bonds. This can be very helpful in some cases. Especially if you are retired, likely need the funds in the near term (down payment for a house) etc. The main problem is that buy low sell high seldom works (otherwise you would beat the market for sure). For example, as soon as the market picks up again, you will miss out on gains if you are holding cash only.

Another reason why active investment is important is that pricing efficiency and allocation of capital relies on informed trading. However, as soon as passive investing will be so prevalent to distort this and hence lead to inefficiencies, active investors should be able to beat the market.

There are very critical voices as well, like the Big Short’s Michael Burry who keeps warning about passive investment for years. He fears these funds distort price discovery, and even more so, he is worried that there is a liquidity issue. Firstly, lots of illiquid stocks are indexed to these funds. Secondly, several passive investment vehicles use derivatives to replicate index performance.

With regards to picking 10 certain losers

Past performance is no guarantee for future performance. The stock market declined in 2022:

  • S&P: -16.72%
  • Apple: -20.81%
  • Google: -32.57%
  • Amazon:-44.78%
  • Block Inc (Square): - 49.19%
  • Netflix: -51.1%
  • Meta (Facebook): -64.20%
  • Tesla: -65%

These are the worst performers in the S&P500 in 2022 (2 out of the worst 8 are the megacap stocks I mentioned in a comment below):

enter image description here

This Washington Post article in 1998 writes that

Xerox shares topped the "Nifty Fifty" list of hot stocks during Wall Street's go-go years of the 1960s.

and the company

... has climbed 150 percent over the past two years.

The figure below shows the stock price of Xerox:

enter image description here

Some of the companies included in the list of the worst 10 in 2021 actually easily outperformed the SPX (^GSPC)in 2022.

enter image description here

If one cannot pick the worst 10, it will be even harder to pick 10 that certainly underperform. If your objective is to pick 10 that certainly underperform (according to your prefered method of evaluating this), do you select the ones where you think they will do worst, or do you prefer to select the ones where you think they might do worse than the market but almost surely will be better than the ones you think do worst?

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    The studies of course confound passive investing with diversification, because index funds provide both. But I submit to you that if investors had an option of (a large index, perhaps S&P500, excluding 10 personally selected "losers"), you'd have a lot more portfolios outperforming the market than when they are asked to pick 10 winners.
    – Ben Voigt
    Feb 16, 2023 at 20:08
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    I doubt excluding 10 stocks makes a large difference. If it were so simply, one might wonder what all these well paid, highly educated fund mangement teams are doing all day long. The biggest losers in last years stock market decline were some of the biggest gainers in the years before. Apple, Google, Amazon, Netflix, Tesla, Meta (Facebook),...
    – AKdemy
    Feb 16, 2023 at 20:35
  • The goal isn't to pick the 10 largest losers (that's even harder than picking 10 winners). The goal is to pick 10 certain losers. That is, we are not minimizing E(return) but maximizing P(return < market_return). BTW the megacap stocks you named were by no means the biggest losers in terms of percentage loss.
    – Ben Voigt
    Feb 16, 2023 at 21:53
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    Index fund investing is so large now (some estimates I read put it around 20-30% of US stock equity is in index funds), that if there truly exists opportunity for active investors to make extraordinary returns by taking advantage of the pricing effects of index investing, then that opportunity currently exists, and we should see evidence of it already.
    – asgallant
    Feb 17, 2023 at 2:28
  • While this is a very well-written and well-researched answer, I do not think that it is necessary for the average return of active investors to be the same as the average market return. One can imagine a case where the average active investor return is higher than average market return, while the average passive investor return is lower.
    – ning
    Feb 22, 2023 at 1:55

Websearch "Warren Buffett bet" for one, serious but admittedly anecdotal, datapoint.

Basically, the active approach needs to not only do better, but do enough better to offset the additional costs. And that isn't easy.

Low-fee index funds have decent returns, give you diversification, don't have a cost per transaction (except for ETFs?)... Unless you are willing to do a lot more work researching your selections or just plain like playing with your money, a suitable mix of these is probably as good, on average, as you're going to get

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    The Buffett bet is a good one. "Buffett bet on monkeys throwing darts to outperform financial advisers" is also a nice short clip. Not sure why someone downvoted this, would be interested to hear a reason.
    – AKdemy
    Feb 16, 2023 at 14:33

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