Passive Power: The Enduring Strength of Index Investing

The concept of index investing has transformed the financial landscape, offering everyday investors a pathway to build wealth with minimal time and effort. Unlike active strategies that chase short-term gains, passive investing capitalizes on the broad momentum of entire markets.

As we navigate the complexities of global markets, the case for embracing a low-cost, diversified approach has never been stronger.

The Rise of Passive Investing

Over the past decade, passive funds have seized a growing share of assets, reflecting a shift in investor sentiment. By September 2025, index vehicles accounted for 18% of US equity assets, outpacing actively managed funds at 13%.

This surge stems from a desire for transparent fee structures and predictable outcomes. More investors are recognizing that trying to outperform benchmarks often leads to higher costs and uncertain results.

In September 2025, long-term index funds attracted a net $59.71 billion in new assets, while active strategies saw $7.45 billion in outflows, further demonstrating growing investor trust.

Consistent Market-Beating Performance

Recent performance data underscores the power of broad market exposure. In the third quarter of 2025, the S&P 500 delivered an 8.1% total return, marking 28 new all-time highs for the year.

Leading index funds like the Vanguard Total Stock Market Index Fund returned 8.2% in Q3, placing it in the 21st percentile among large-blend peers. Meanwhile, the Vanguard Growth ETF gained 9.6%, surpassing its category average of 7.6%.

Over three years, all ten of the largest US stock index funds outperformed their peers, averaging a 24.9% return. This consistent outperformance vs. active peers highlights the enduring strength of broad-based strategies.

Even amid market corrections, the S&P 500’s deepest drawdown was 18.9% in 2025, underscoring that broad markets rebound over time and reward patient investors.

The Cost Advantage

One of index investing’s greatest appeals is its significantly lower expense ratios. Many popular funds charge between 0% and 0.16% annually, a stark contrast to active management fees that often exceed 1%.

For context, some index ETFs charge as low as 0.03%, while mutual funds often remain below 0.1%, ensuring that investors retain the lion’s share of market returns.

These savings compound over time. Investors in index funds have saved roughly $503 billion in fees compared to those in actively managed alternatives, directly boosting net returns.

• Expense ratios as low as 0%
• Reduced portfolio turnover
• Lower trading and management costs

Diversification, Risk Reduction, and Tax Efficiency

Index funds provide broad market diversification across sectors, smoothing volatility by spreading risk. Rather than betting on individual stocks, investors tap into entire market segments.

Lower turnover also translates into potentially higher after-tax returns, as fewer capital gains distributions occur. For near-retirees, this predictability is invaluable, safeguarding nest eggs against large market swings.

• Exposure to entire market-cap spectrum
• Reduced single-stock risk
• Tax-efficient trading structure

Long-Term Wealth Accumulation: Projecting the Future

Historical averages suggest stocks return about 10% annually over extended periods. Even at a conservative 6% net return, a $1,000 investment in an index fund could grow to $1,782 in 10 years. The same amount in an active fund, assuming a 5.35% return, would reach only $1,684.

This difference may seem modest at first, but it underscores how small differences amplify over long horizons. A $10,000 index fund investment could exceed $17,820 in a decade, whereas the same active fund investment might trail by hundreds of dollars.

Building Your Portfolio with Index Funds

Constructing an index-based portfolio begins with identifying core allocation funds. These typically include large-cap, mid-cap, and international equities, balanced by bond index funds for stability.

Start with a core-satellite approach, using broad index funds for 80% of your equity allocation and tactically allocate 20% to specialized segments if desired.

Consider these principles when selecting funds:

• Diversify across multiple market segments
• Choose low-cost, high-liquidity funds
• Maintain a disciplined, long-term outlook
• Rebalance periodically to your target allocation

Adopting a disciplined, emotion-free investment approach ensures you stay the course during market fluctuations, avoiding costly mistakes driven by fear or greed.

Embracing Passive Power

Index investing is more than a strategy; it’s a philosophy built on the premise that markets, over time, reward broad ownership. By minimizing costs, diversifying risk, and eliminating emotional decision-making, investors position themselves for enduring success.

The evolution of ETFs from simple trackers to versatile tools underscores how passive investing has driven innovation across financial markets, empowering individuals with institutional-grade strategies.

As you chart your financial journey, remember that true strength lies in patience and simplicity. Passive power offers a reliable engine for wealth creation, one that has stood the test of time and thrived amid changing market conditions.

Embrace the enduring strength of index investing and let its steady momentum guide you toward your long-term goals.