[misnamed]

Index funds have to outperform active funds and traders in aggregate by definition. It's not a claim or debate, it's simple math. After savings on taxes and expenses, indexes represent the average + a fair bit more than other options. There is no feedback effect, except that more people indexing will lead to more trading arbitrage opportunities, which people will take and which doesn't hurt indexers, who will continue to take the market average return plus what they save in expenses and taxes. As an aside: the last place to get financial advice is Zero Hedge. Try this instead:

http://www.etf.com/sections/index-investor-corner/swedroe-wh...

[opportune]

This is true in aggregate, with the additional caveat of over an asymptotically long timeline. Part of the goal of hedge funds, or at least some, is to hedge investments so that you might not get hurt as hard during a recession as the market.

There can still be active funds that perform better than the market, or the market as measured by an index ETF. Unfortunately with the way funds are marketed, funds can often just employ survivorship bias so that all funds look very good. Also, index funds do not have to outperform active funds/traders by definition, because not only can active funds invest in assets outside of the index (other stocks, real estate, futures, options, etc.), but active funds can also have more profitable allocations. Obvious proof: if the value of every stock in the S&P 500 were now worth 0, active funds wouldn't, ergo active funds will not necessarily always be outperformed by indexes.

I think that for your average investor, indexes are the way to go at the moment, but it's not impossible for there to be a world where active funds are often better.

[pedrocr]

>This is true in aggregate, with the additional caveat of over an asymptotically long timeline.

This is true over any timespan. At any point in time the active part of the market holds the same stocks as the passive part of the market and thus has the exact same risk and returns. This is as true over a century as it is over a month.

>not only can active funds invest in assets outside of the index (other stocks, real estate, futures, options, etc.), but active funds can also have more profitable allocations

If your active fund is investing in different markets then it's not comparable to the index. If there's an advantage in investing in those assets the solution isn't to buy the active fund. The solution is to find the index funds that will also give you exposure to the same assets and buy those instead gaining the same advantage of the same returns with less fees.