Dr. Mark J. Perry, professor of economics at the University of Michigan, pointed out studies supporting the premise that index funds outperform their active counterparts. He quotes a 2014 study done b...
Dr. Mark J. Perry, professor of economics at the University of Michigan, pointed out studies supporting the premise that index funds outperform their active counterparts. He quotes a 2014 study done by S&P Dow Jones indices that considered 2,862 active, broad based equity domestic funds that operated since March 2010. The study used funds that ranked in the top quartile for performance in the first year, 2010, and tracked them to see whether they remained in the top quartile through 2014. Out of the funds that had performance that beat 75% of peers only 0.28% attained top 25% performance over 5 consecutive years. The study's conclusion is that few funds sustain outperformance over time and that some funds with excess returns over their benchmark can become underperformers over time, according to Keith Loggie, senior director of global research and design at S&P Dow Jones Indices.
S&P Dow Jones Indices LLC
Stock market efficiency make index funds appropriate for most investors William D. Nordhaus, a Yale economics professor, highlighted that the 2014 S&P Dow Jones Indices study illustrated active fund performance that resembled results obtained flipping a coin, only slightly worse. Nordhaus agrees that most investors will be better off using index funds as cornerstones of their portfolios. Consistent manager performance on the top quartile over five consecutive years was slightly more probable tossing a coin versus having real world fund managers like the ones included in the S&P Dow Jones 2014 study choosing stocks. However, he concedes that there may be a few talented fund managers that can outperform due to skill and not chance alone. Norhaus and other academics like Paul Samuelson, the late Nobel laureate from M.I.T., argue that stock markets are liquid and efficient. Information is incorporated quickly into trading making it extremely hard to outperform. Index funds are not core of investors' portfolios