Why 87% of active funds lose to the S&P 500 over 25 years

87% of large-cap active funds underperform the S&P 500 over a 25-year horizon.

This statistic comes from the S&P Dow Jones Indices SPIVA (S&P Indices Versus Active) U.S. Year-End 2023 report. It covers the period ending December 31, 2023, and tracks thousands of funds. The result is not a fluctuation of a single year; it is a structural outcome of how active management fees interact with compound growth.

Most investors assume fees are a small line item subtracted once a year. In reality, fees act as a permanent reduction in the growth rate of the capital. A 0.64% annual fee spread might look negligible compared to a 7% market return, but over 25 years, the difference in ending wealth is substantial. The underperformance is not primarily due to managers picking the wrong stocks; it is due to the math of compounding costs against a passive benchmark.

The math, briefly

The average active large-cap mutual fund charges an expense ratio of 0.68%, according to Morningstar’s 2023 fee data. A standard S&P 500 index fund, such as the Vanguard 500 Index Fund, charges 0.04%. The difference is 0.64% per year.

This spread is applied to the entire balance every year, not just the principal. In year one, the cost is roughly $640 on a $100,000 investment. In year ten, that cost is calculated on a larger balance. In year twenty-five, the fee is calculated on a balance that has grown significantly. The active fund loses the gross return and pays the fee, while the index fund pays a fraction of the fee and retains the gross return.

The S&P Dow Jones Indices report confirms the outcome of this math. Over 25 years, 87% of active large-cap funds end up below the index. Over 15 years, that figure is 84%. Over 10 years, it is 83%. The longer the horizon, the more the fee drag compounds against the active manager.

The visualization

The following table compares two $100,000 investments over 25 years. Both start with the same gross market return of 7.00%. The index fund deducts 0.04% annually. The active fund deducts 0.68% annually.

The table assumes a constant 7.00% gross return for both portfolios. The only variable is the expense ratio. By year 10, the fee spread has cost the active investor nearly $6,500 in lost growth. By year 25, the active fund ends with $462,017, while the index fund ends with $581,328.

The difference of $119,311 represents roughly 20.5% of the index fund’s final value. This loss is not recovered in future years. The active fund must outperform the index by more than the fee spread just to break even, and then by a wider margin to make up the lost compounding.

The synthesis

The fee spread explains the majority of the underperformance, but it is not the only factor. Active managers trade more frequently than passive indexes, which creates a second layer of cost: transaction fees and capital gains taxes.

When a manager sells a winning stock to buy another, the fund realizes capital gains. These gains are passed to the shareholder, creating a taxable event even if the shareholder did not sell their shares. The S&P Dow Jones Indices report notes that turnover rates in active funds average 60% to 80% annually, compared to near 0% for buy-and-hold index funds. This turnover generates friction costs that are not included in the expense ratio but still reduce net returns.

Additionally, the SPIVA data addresses survivorship bias. Older reports sometimes excluded funds that closed down, which artificially inflated the performance of the remaining “survivors.” The current methodology includes dead funds in the average performance calculation. This means the 87% underperformance rate accounts for funds that failed entirely, not just those that stayed open. The statistic reflects the reality of the entire universe of funds, not just the winners.

The math says fees compound. The behavior says investors chase past performance. When an active fund outperforms for five years, investors pour money into it. When it reverts to the mean in year six, the capital remains locked in, continuing to pay the higher fee. This cycle allows the fee drag to accumulate even during periods of short-term outperformance.

The closer

The fee spread costs $119,311 on a $100,000 investment over 25 years. That is not a fee; that is a permanent reduction in capital that cannot be earned back without additional risk. The 87% underperformance rate is not a prediction of market direction; it is the arithmetic certainty of paying for a service that statistically fails to cover its own cost. For an investor, the choice is between a guaranteed 0.04% drag or a variable 0.68% drag that fails to deliver the alpha 87% of the time. The math says the index fund keeps the $119,000. The active fund spends it on management.