Index Funds vs. Active Management in Canada: What 10 Years of Evidence Says

Over the ten years to December 2025, 98.7% of the global stock funds sold in Canada earned less than the market they were trying to beat. Not most of them. Almost all of them.

That number comes from S&P Dow Jones Indices, the people who run the S&P 500. Twice a year they publish a scorecard called SPIVA that compares every active fund to the index it competes against. This article walks through the Canadian results, the math that explains them, why picking last year's winner does not work, what fees do to your money over 25 years, and the places where a manager can honestly still earn a spot.

Two ways to own the stock market

An index fund buys every company in a market, in proportion to its size, and holds them. Nobody picks. The fund earns whatever the market earns, minus a very small cost.

An actively managed fund hires a team to pick which companies to own and when to sell them. The goal is to beat the market. The cost of the team, the trading and the sales network comes out of your return every year, whether the team beats the market or not.

Most mutual funds sold in Canada are the second kind. The question is whether the extra cost buys extra return.

The arithmetic that settles it

In 1991, Nobel laureate William Sharpe wrote a three-page paper called The Arithmetic of Active Management. The argument fits in two sentences. Before costs, the return on the average actively managed dollar equals the return on the average index dollar, because together they are the whole market. After costs, the average active dollar must earn less.

That is not a forecast or an opinion. It is addition and subtraction. For every manager who beats the market, another investor somewhere is below it, and both of them paid to play. The scorecards below are what that arithmetic looks like in real accounts.

The Canadian scorecard

The SPIVA Canada Year-End 2025 report covers the ten years to December 31, 2025. Here is the share of funds in each category that trailed their index.

• Canadian stocks: 93.4% trailed over one year, 95.9% over five years, 98.8% over ten years.
• Global stocks: 83.3% over one year, 97.3% over five, 98.7% over ten.
• U.S. stocks: 89.1% over one year, 100% over five, 97.1% over ten.
• International stocks: 94.7% over one year, 93.0% over five, 98.7% over ten.

Look at the ten-year numbers. In every category, between 97 and 99 of every 100 funds lost to the index. In U.S. stocks, over five years, not a single fund beat it.

There is a second number in the same report that most fund brochures never show. Over those ten years, 39.3% of all the funds that existed at the start were merged into other funds or shut down. The scorecard counts them as trailing, because that is what happened to the people who owned them. A fund company can retire its worst performers so they never show up in an average. Your account cannot.

It is not a Canadian problem

The U.S. results, with a bigger and cheaper fund industry, are only slightly better. The SPIVA U.S. Year-End 2025 report found that 85.6% of large-company stock funds trailed the S&P 500 over ten years, 89.9% over fifteen, and 92.9% over twenty. The longer you hold, the worse the odds get, because the fee is charged every year and one bad year is enough to lose the lead.

Morningstar runs its own version, the Active/Passive Barometer, which compares active funds to the real index funds investors could have bought instead of a paper index. The mid-2026 edition, covering 9,226 funds, found that 25% of active funds survived and beat their index peer over ten years. For U.S. large-company funds, the success rate was 13%.

Can you pick the winners ahead of time?

This is the natural next question. If 1% to 3% of funds win, why not buy those?

Because the winners do not stay the winners. S&P's Persistence Scorecard for Canada followed 169 funds that sat in the top quarter of their category at the end of 2021. It counted how many were still in the top quarter in each of the next four years. The answer was one. Across all seven categories it tracked, the share of funds that stayed in the top half over two five-year periods was 25% or less, which is what a coin flip would give you.

The U.S. version found the same thing. Of large-company funds that were above average, 4.5% stayed above average for five straight years. Pure chance would give you 6.25%.

Eugene Fama and Kenneth French, in a 2010 paper called Luck versus Skill, tested whether the winning funds showed real skill or just the luck you would expect in any large group. Adding back every fund's fees lifted the average excess return to 0.1 percentage points a year. Take the fees back out and it is negative. A past track record tells you very little about the next ten years, and a fund company's brochure is built on the assumption that it does.

Why the math comes out this way: fees

Morningstar's barometer has one finding that explains most of the others. It sorts funds by cost. The cheapest fifth of active funds beat their index peer 33% of the time over ten years. The most expensive fifth managed 20%. Vanguard's long-running study, The Case for Low-Cost Index-Fund Investing, reached the same conclusion from a different direction. Of everything it tested, a fund's cost was the single strongest predictor of how it did.

Canada is an expensive place to own a fund. A typical Canadian stock fund in its F class, the version you hold when your advisor charges a separate fee, costs about 1% a year. The same fund in its A class, with the seller's pay built into the price, runs closer to 2%. Morningstar's 2019 Global Investor Experience study put the asset-weighted median cost of a Canadian stock fund at 1.98% a year, because most of the money still sits in the bundled version, and its 2022 edition graded Canada Below Average on fees among the 26 markets it covers. Its 2025 Canada Fund Fee Study found Canadians still hold about $1 trillion in fund classes that pay a commission to the seller, costing roughly $10 billion a year. Fees are falling, but slowly. The average fund cost dropped 22 basis points over ten years.

Here is what that cost does to a retirement account. Take $100,000, growing at 6% a year before costs, held for 25 years.

• An index fund costing 0.15% a year: $414,000 after 25 years.
• A typical F-class stock fund costing 1% a year: $339,000.
• The same fund with the seller's pay built in, at 2% a year: $267,000.

The index fund leaves you $76,000 more than the 1% fund, and $148,000 more than the 2% version, on every $100,000 you started with. Multiply by whatever your account holds. That gap is not a forecast of market returns; the 6% is an assumption, and a lower or higher market changes the totals. The gap between the rows is the fee, and the fee is the one part of the result that is known in advance.

We have covered the fee side in more depth before, in Are Your Investment Fees Costing You $300,000 in Retirement? and How Investment Fees Affect Your Retirement in Ontario.

Where a manager can still earn a place

An honest version of this article has to say where the evidence goes the other way.

Bonds. Bond managers beat their index far more often than stock managers do. Morningstar's mid-2026 barometer put the ten-year success rate for fixed-income funds at 45%, the best of any group, and SPIVA U.S. found only 30.3% of general bond funds trailed their index over three years. Bond indexes are built in ways a careful manager can improve on, and the fee gap is smaller.

Single good years. In 2025, most Canadian dividend and income stock funds beat their index; only 44.2% trailed. One year happens. It is the ten-year column that tells you whether it was skill.

Emerging markets and real estate show better one-year and ten-year success rates than large, well-covered markets, though still under half.

The lesson is not that active management never works. It is that when you use a manager, you should do it on purpose: a fixed slice of the portfolio, a written rule for when to sell, and a clear view of the odds before you start. In our own portfolios, index funds are the core. A manager is an option for clients who want one, and they hear the base rate first.

What this means for a retirement plan

A retirement plan is a promise to turn savings into income for thirty years. Every dollar of fee comes out of that income, and it comes out first, before the market has said anything.

That is why fund costs are one of the items in the 57 Checks we run on every plan. The check is simple: what does each fund in your account cost, what does it hold, and could the same holdings be owned for a tenth of the price. For most people the answer changes their retirement income more than any stock pick ever will.

If your account is full of funds you did not choose, we will run that comparison on one page, after fees, before anything moves.

Shelf life

Every number here has a date on it. SPIVA publishes twice a year, so the percentages above move a point or two with each release. Morningstar's barometer refreshes mid-year and year-end. The fee figures for Canada are the slowest to change; the 1.98% median is from 2019 and fees have fallen since, though not by much. The $76,000 illustration depends on a 6% assumption and a 25-year hold, so it changes with your own numbers.

Sharpe's arithmetic does not have a shelf life. As long as investors together own the market, the average manager will trail it by the fees charged. That was true in 1991, it is true in the tables above, and it will be true in the next scorecard.

If you want to know what the funds you own today are costing you, book a fit call. We will put your current account and an index version side by side, after fees, on one page.