From Ryan Vlastelica via MarketWatch.
The argument behind passive investing, and the reason it has been the overwhelming choice of investors over the past decade, is simple: data has repeatedly shown that not only does it offer an extremely high likelihood of better long-term performance, but it does so for vastly lower costs.
About the latter point there is no dispute. Passively managed funds — which simply mimic the performance of an index like the S&P 500 rather than trying to outperform a benchmark through individual security selection, as with an actively managed one — are significantly cheaper, one of primary reasons that investors have poured hundreds of billions of dollars into them in recent years, redeeming a similar amount from active ones.
According to data from Morningstar, actively managed funds carried an average fee of 0.72% in 2017, nearly five times the 0.15% average charged by passive funds. An actively managed product would have to do significantly better than the index over time to be worth the additional cost.