A lot of professional money managers like to try to pick winning stocks and outperform the market. Most of them don’t succeed. However, one study found that 79% of large-cap domestic equity funds underperformed the S&P 500 in 2025. Another found that 95% of actively managed large-cap core funds have lagged the S&P 500 over the past 10 years.
This is a big reason why the ETF industry has gone through such a boom period over the past several years. With so many active funds underperforming the index, why not just invest in an ultra-low-cost index fund and match the index instead?
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When you invest in individual stocks, you’re betting on the success of that company. Because it’s a sample size of one, the range of potential outcomes can go from home run to catastrophic.
Your experience could be as positive as buying Nvidia a few years ago, riding a big bullish rally, and vastly outperforming the broader market. Or it could be like investing in Nike three years ago and watching your investment drop in value by half. These aren’t just tiny, high-risk, small-cap stocks that can encounter these swings. Even the biggest, most successful companies can experience prolonged downturns.
But when you choose to instead invest in a broad stock market fund, such as the Vanguard S&P 500 ETF (NYSEMKT: VOO) or the Vanguard Total Stock Market ETF (NYSEMKT: VTI), you mitigate a lot of the downside risk that exists with individual companies. You don’t avoid it altogether. But because any stock is such a small piece of a large portfolio, its impact on overall returns can be minimal.
What you end up with by choosing a broad market ETF is an investment in the entire U.S. economy, not an individual company. Over time, that can still experience bull markets and corrections. But the highs and lows tend to be less extreme. And that’s the better path to creating steadier long-term wealth over years or decades.
One of the underappreciated aspects of investing in a stock market index fund is that it evolves over time. Right now, tech is the biggest sector in the S&P 500. Go back in time, and you’ll find a period where financials were the biggest sector. You’ll find a time when energy had a big allocation. If you want to go back many decades, railroads were the biggest segment of the economy.
