There are two main reasons why index funds outperform active funds.
1. Fees. Active funds start as underdogs because of their fees.
2. The distribution of returns in the stock market is very uneven. Just handful of well performing stocks at any moment account make significant gains in market. Index funds pick these winners every time. Active funds start as underdogs even in the stock picking game.
> The risk of substantial index underperformance always dominates the chance of substantial index outperformance, with the difference being greater the smaller the size of the selected sub-portfolios. It is far more likely that a randomly selected (small) subset of the 500 stocks will underperform than overperform, because average index performance depends on the inclusion of the extreme winners that often are missed in sub-portfolios.
1. Fees. Active funds start as underdogs because of their fees.
2. The distribution of returns in the stock market is very uneven. Just handful of well performing stocks at any moment account make significant gains in market. Index funds pick these winners every time. Active funds start as underdogs even in the stock picking game.
Why Indexing Works, Heaton , Polson and Witte, 2015. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262
> The risk of substantial index underperformance always dominates the chance of substantial index outperformance, with the difference being greater the smaller the size of the selected sub-portfolios. It is far more likely that a randomly selected (small) subset of the 500 stocks will underperform than overperform, because average index performance depends on the inclusion of the extreme winners that often are missed in sub-portfolios.