On Index Funds by Stephen Littauer
Do mutual funds underperform the market? Statistics would indicate so. Index funds may better suit investor needs.
Most mutual funds underperform the market. Over the past 10 years, CDA/Wiesenberger Mutual
Funds Update reports that 356 mutual funds with an investment objective of long-term growth had an
average annual return of 15.8%. The equivalent annual return for the Standard & Poor's 500 index during
the same period was 19.1%. Was the difference of 3.3% a fluke or statistical error? Let's look at figures
from additional sources.
Morningstar Mutual Funds service reports that over the same 10-year period, 534 U.S. diversified equity
mutual funds had an average annualized total return of 15.95%, compared with 19.1% for the S&P 500
and 18.2% for the Wilshire 5000 index, which is a measure of the total U.S . stock market. Returns for
the one-, three- and five-year time frames also trailed both indices. In fact, according to the Vanguard
Group, one of the largest mutual fund managers in the U.S., the S&P 500 outperformed 76% of all
general equity mutual funds over the past five years as of March 31,1992.