The Perils of Investing in Index Funds

A sea change has been quietly reshaping portfolios in recent years. Investors have been fleeing actively managed funds and flocking to index funds. In 2017 (through November), investors pulled $191 billion from actively managed U.S. stock funds and poured $198 billion into indexed U.S. stock funds, according to Morningstar, the investment research firm. Investors have, on net, withdrawn money from active U.S. stock funds and invested in U.S. stock index funds in every year since 2007. Those investors have likely been chasing strong relative performance among index funds. Not a single category of actively managed funds has managed to beat comparable index funds over the past 10 years through June 2017, according to Morningstar.

But the tide could be turning. Active management staged an impressive comeback in 2017. In the