Index Fund Benefits: Why 90% of Investors Should Own Them (2026)

An index fund holds every security in a published index in the same proportions, rather than trying to select winners. Its advantages are structural rather than a matter of skill or luck: it costs less to run, trades less often, distributes fewer taxable gains, and diversifies instantly. Each of those is a mathematical property of the design, which is why the advantage persists rather than fading.

Advantage One: Cost, Which Is Known in Advance

An index fund needs no research team and no trading desk making judgement calls, so its expenses are a fraction of an active fund's. Broad market index funds are widely available below 0.10% while active equivalents commonly charge 0.60% to 1.00%. That gap is the only part of future returns anyone knows in advance, and it accrues every year regardless of what markets do.

The arithmetic is unforgiving. An active manager charging 0.85% more must outperform by 0.85% every year, before tax, simply to match the index fund. Doing that consistently for decades is rare, and identifying in advance who will do it is harder still.

Advantage Two and Three: Turnover and Tax

A fund that replaces a fifth of its holdings each year pays trading costs on all of it and realises capital gains it must distribute to holders. An index fund only trades when the index itself changes, which is infrequent for broad benchmarks. Fewer trades means lower cost and, in a taxable account, far fewer distributions to pay tax on.

That tax effect is easy to underrate. The IRS taxes distributed capital gains in the year they are distributed, so a high-turnover fund creates a tax bill from activity you did not choose. An index fund defers most gains until you sell, and deferred tax leaves more capital compounding in the meantime.

1. Check the expense ratio in the prospectus fee table, not the marketing page.
2. Check turnover: broad index funds are typically in low single digits, active funds often 30% or more.
3. Confirm the fund tracks a published, rules-based index rather than a proprietary screen.
4. Compare tracking difference against the benchmark over three and five years.
5. In a taxable account, look at the history of capital-gain distributions, not just performance.

                Assumptions (illustrative, not a forecast)
  Starting balance                     $200,000
  Gross annual return                      7.0%
  Horizon                              25 years
  Taxable account, 15% on distributions
Index fund: 0.05% fee, 3% turnover
  Fee drag                                0.05%
  Tax drag on distributions               0.10%
  Net return                              6.85%
  Final balance                       $1,032,000
Active fund: 0.85% fee, 45% turnover
  Fee drag                                0.85%
  Tax drag on distributions               0.45%
  Net return                              5.70%
  Final balance                         $792,000
Difference                              $240,000
The active fund needed to gross 8.15% to match
a 7.0% index return. It had to be right by more
than a full point, every year, for 25 years.
              

Nothing in that example assumes the active manager was poor. It assumes they were exactly average before costs, which is the outcome the arithmetic of markets makes most likely.

Advantage Four: Behaviour You Can Actually Sustain

An index fund tracks a benchmark you can look up, so there is nothing to second-guess. Active funds invite a specific mistake: performance is compared to the market every quarter, and a run of underperformance prompts a switch at exactly the wrong moment. Removing that decision removes the most expensive behaviour in investing.

This is where the ninety percent figure comes from. Most investors are not going to research managers continuously for forty years, and a strategy that requires no monitoring is one they will actually stay in through a bear market.