Every investor eventually faces the same question: should I buy a fund that simply tracks the market, or try to beat it by picking stocks, or by paying a professional to do so? A long-running scorecard from S&P Dow Jones Indices offers some of the best available evidence, and its recent results are sobering for stock pickers.
What the Latest Data Show
The SPIVA U.S. Scorecard compares actively managed funds with their benchmark indexes. According to the report for the year ending in 2025, 79 percent of all active large-cap U.S. equity funds underperformed the S&P 500. That was worse than the 65 percent rate in 2024, and the fourth-worst year for active large-cap managers in the scorecard's 25-year history.
In other words, in a year when the benchmark's gains were strong, most professionals who tried to beat it ended up behind. The report attributed part of the difficulty to persistent large-cap outperformance, which left stock pickers fewer opportunities.
Not a One-Way Street
The data are less one-sided outside large caps. The same SPIVA report found that 55 percent of mid-cap funds and 41 percent of small-cap funds underperformed their benchmarks in 2025, meaning that a sizable share of small-cap managers did beat the index. A year earlier, active small-cap managers had a record year, with 70 percent exceeding their benchmarks, according to Institutional Investor's account of the 2024 scorecard.
The lesson is that active management can succeed in some years and some corners of the market. The harder question is whether an investor can pick, in advance, the managers who will do it. SPIVA also publishes persistence scorecards, which examine whether top performers stay on top, and the 2025 edition highlighted a lack of consistency over time for many categories.
Why Costs Matter
Active funds typically charge more. A TIME explainer on index investing noted that many index funds have fees of less than 0.4 percent, while actively managed funds often charge more than 0.77 percent. The figure is the expense ratio, the annual percentage deducted from fund assets, and it comes out of returns whether the fund does well or badly.
Small differences compound. A one-percentage-point annual fee gap on a $100,000 account is $1,000 in the first year, and the money lost to fees can no longer grow. Over decades, the cumulative effect can be substantial, though the exact amount depends on returns and contributions.
The Case for Active Management
Defenders of active management make several points. A skilled manager may reduce losses in downturns, take positions an index cannot, or find opportunities in less-followed parts of the market such as small caps and international stocks. Some investors also prefer funds that screen out certain industries or reflect specific values.
Index funds have trade-offs, too. Because a market-cap-weighted index holds more of whatever has risen the most, it can become concentrated in a few large companies. Index investors also accept the market's full decline in a downturn, with no manager to step aside. As one beginner's guide put it, index funds are not risk-free; they make diversification easy and keep fees low.
What Individual Stock Picking Involves
Buying single stocks adds another layer. Success requires research, discipline and tolerance for large swings in any one company. A single holding can lose most of its value, which is why diversification is a core principle in investor education from the SEC. Investors who enjoy picking stocks often limit them to a small portion of a portfolio and keep the rest in broad funds.
How Savers Can Apply This
Many 401(k) plans offer both index options and actively managed funds, and the fund fact sheet shows the expense ratio. A worker comparing options might check the fees, the fund's holdings and its record against the benchmark over several years, not just the last one. Past results do not predict the future, and a fund that beat the market last year may not do so again.
The Bottom Line
The weight of the evidence favors low-cost index funds as a core holding for many long-term investors, in large part because fees and the difficulty of consistently beating the market hold most active managers back. Active management still has a place for some investors and some markets. The key is to know what you are paying for, and to avoid assuming that expensive means better.
