That figure, however, is the gross pie, before costs. Funds charging sales commissions swallow even more of the returns. By contrast, one of the key advantages of an index fund should be its low cost . An index fund should pay only minimal advisory fees, keep operating expenses at the lowest possible level, and keep portfolio transaction costs at minimal levels. So, the magic of the index fund is that it leaves a larger share of the pie for investors.
Actual results confirm the pie analogy.
Over time, the broad stock market indexes have outperformed the average general equity fund. Because these distributions are taxable for shareholders, it is clearly an advantage to defer their realization as long as possible. In periods of market declines, index funds, of course, can be expected to have somewhat larger declines than funds that maintain cash reserves. Indexing gains its advantage over the long term. Figure 2 shows the percentage of equity mutual funds outperformed by the Wilshire 5000 Total Market Index in each year since 1990.