Index investing has never been more popular, as small investors flock to funds that match the market's performance, often at low cost. But so far this year, actively managed stock funds have outperformed index funds, according to Morningstar. Is there a chance that indexing has become "too popular" six years into a bull market?
Through the end of April, U.S. stock mutual funds that are actively managed rose 2.25%, while mutual funds that track stock indexes were up 2.2% in the same period, reports Morningstar. The S&P 500 gained only 1.9% during that time. It’s a rare victory for active fund managers, who have long dominated the business but have been losing ground to cheaper index funds. Index funds have consistently outpaced active funds for years, but as the stock market has slowed, active pickers have gained ground, and the market’s sideways trading hasn't been favorable to index funds that mimic the market's performance.
Though investors may be tempted by the news to try to beat the market, the less expensive index funds have outpaced actively managed funds for years. And for individual investors, experts emphasize the importance of diversity. “It’s important to get into a diversified portfolio because what performs well in one year will not perform well in another year, and having that diversification balances you out,” says Naureen Hassan, head of Charles Schwab’s Intelligent Portfolios. “ We want diversification… market cap, fundamentals, bonds, commodities, a broad set of diversification for better outcomes for investors. Asset allocation is the key component to successful investing.”