Why Most Active Fund Managers Underperform and How VUAA Quietly Wins
How a simple S&P 500 ETF quietly outperforms over 90% of active fund managers in the US and Europe
Over the past decade, countless investors have debated whether it is better to actively pick stocks or to invest in low-cost index funds. The data tells a clear story: in most cases, the market wins. More specifically, a passive investment in the S&P 500 through ETFs like Vanguard’s VUAA consistently outperforms the vast majority of actively managed funds.
In this post, we will explore how VUAA has performed over the past 1, 5, and 10 years compared to active fund managers in both the United States and Europe. We will use the most reliable data sources available, including the S&P Dow Jones Indices' SPIVA reports, to demonstrate how the odds are heavily stacked against active managers. We will also look at why this happens, what it means for investors, and what to consider when building a portfolio.
What is VUAA?
VUAA is the Vanguard S&P 500 UCITS ETF, a European-listed fund that tracks the performance of the S&P 500. It is denominated in USD and provides European investors with exposure to the largest US companies, mirroring the same index tracked by the more well-known US-based VOO.
Its low fees, diversification, and tax efficiency have made VUAA an increasingly popular choice among long-term investors in Europe. But beyond its convenience, the most important point is this: it works.
Historical Performance of VUAA
Let us start by looking at VUAA’s annualized returns over the past 1, 5, and 10 years.
1-Year Return: approximately 9 percent
5-Year Annualized Return: approximately 15 percent
10-Year Annualized Return: approximately 12 to 13 percent (tracking the S&P 500)
These are strong numbers in absolute terms. They are even more impressive when compared to how active managers performed over the same timeframes.
The Data on Active Managers
According to SPIVA (S&P Indices Versus Active) reports, the majority of active managers consistently underperform their benchmarks. Let us break it down:
In the United States:
Over 1 year: approximately 65 percent of large-cap active funds underperformed the S&P 500
Over 5 years: approximately 87 percent underperformed
Over 10 years: approximately 91 percent underperformed
In Europe:
Over 1 year: approximately 85 percent of active funds underperformed the S&P Europe 350
Over 5 years: approximately 92 percent underperformed
Over 10 years: approximately 93 percent underperformed
This is not a one-time phenomenon. It is a consistent pattern backed by years of research across different market cycles.
Why Active Managers Struggle
Several factors contribute to this persistent underperformance.
Fees: Active funds typically charge higher fees than index funds. These costs eat into returns and are hard to justify unless the fund significantly outperforms its benchmark.
Turnover: Active funds often trade frequently, trying to time the market or pick winners. This creates both direct trading costs and indirect tax inefficiencies.
Benchmark Drag: Many active funds claim to be benchmark-aware but do not stray far from the index. In the end, they closely track the market but with higher fees, leading to lower net performance.
Scale: As funds grow larger, their flexibility to act nimbly decreases. Large active funds often struggle to beat the market because their size works against them.
Human Behaviour: Even skilled managers are subject to emotional and cognitive biases. Short-term pressures from investors or firm mandates can lead to poor decisions and performance inconsistency.
The Case for VUAA
What makes VUAA compelling is not just its ability to match the market, but its ability to outperform nearly every alternative that claims to beat the market.
It is a fund with ultra-low fees, near-perfect index tracking, and daily liquidity. It offers exposure to the best companies in the US economy, including Apple, Microsoft, Amazon, and Google, without the need to guess which of them will outperform next year.
In addition to outperforming most active managers, VUAA offers several other advantages:
It is tax efficient for European investors
It eliminates single-stock risk
It allows investors to benefit from long-term market growth with minimal effort
For those who prefer a simple, rules-based, and evidence-backed investment strategy, VUAA is difficult to beat.
Misconceptions About Passive Investing
Critics often argue that passive investing is too simple. Some say it cannot outperform active strategies in volatile or bear markets. While active managers may outperform in specific years, they almost never do so consistently. The SPIVA data shows that even those who beat the market in one year usually revert to underperformance later.
Another common argument is that passive investing creates bubbles. This is a misunderstanding of how capital markets work. Index funds buy based on market cap, and while they may reinforce trends, they do not create them. The idea that indexing distorts markets is mostly promoted by those whose businesses depend on active management fees.
Long-Term Investing and the Compounding Advantage
The real power of index investing is compounding. A 12 percent annual return doubles your money roughly every six years. With VUAA delivering near that level of return historically, long-term investors benefit massively from staying the course.
Active management, on the other hand, tends to underperform when compounding is most important. Small underperformances year after year become large opportunity costs over a decade.
What to Do with This Information
If you are managing your own portfolio or advising others, consider this:
Passive index investing is not just for beginners. It is often the smartest choice, even for seasoned investors.
Historical data strongly favours low-cost, broad-market index funds over active management.
VUAA offers one of the cleanest, most efficient ways to get exposure to the US market from Europe.
For those who prefer to invest monthly or follow a dollar-cost averaging strategy, VUAA fits perfectly. It takes the guesswork out of the process and keeps costs and complexity low.
A Final Thought
Warren Buffett has famously recommended the S&P 500 index fund to most investors. His reasoning is simple: beating the market is incredibly hard, and most who try end up behind.
VUAA is not flashy. It is not exciting. It does not promise to beat the market. It just delivers what the market gives, minus minimal fees. And in doing so, it quietly outperforms the overwhelming majority of the finance industry.
If your goal is long-term wealth creation, few tools are more effective, reliable, or efficient than this.
Indexing is not giving up. It is choosing not to fight a battle that 90 percent of professionals lose.
Choose wisely.
