Billionaire Mark Cuban has been successful as an active investor. But for the average investor, he says index funds make more sense.
These funds give investors access to a diversified basket of securities and don’t require them to understand the ins and outs of the financial markets. Read on for the benefits of investing in index funds.
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Benefits of index investing
Index funds aim to replicate market indexes such as the S&P 500. Here’s why they can be a good addition to your investment portfolio.
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1. Tax efficiency
Index funds tend to be more tax-efficient than active funds as they don’t involve as much buying and selling of securities. Active fund managers are constantly adding and removing securities from a fund, which results in taxable gains, and sometimes short-term gains, which are taxed at a higher rate than long-term gains. The taxes on trades can wipe away a meaningful portion of total gains.
You will likely have to pay taxes on any gains when you sell shares of the fund, but if you’ve held them for more than a year, you’ll be taxed at the long-term rate.
2. Low fees
Index funds tend to come with lower fees than their actively-managed counterparts, since there’s no Wall Street expert getting paid for identifying the best stocks to add and remove.
You can find plenty of index funds with similar (or better) performances than their active peers that have expense ratios below 0.10%. Morningstar found that the average expense ratio of active funds was 0.59% in 2023 and 2024 compared to a 0.11% average for passive funds.
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3. Performance
Passive funds are not only cheaper than actively-managed funds, they also tend to outperform.
Just 33% of active mutual funds and exchange-traded funds (ETFs) in the U.S. beat their asset-weighted average passive counterparts between July 2024 and June 2025, according to Morningstar.
4. Diversification
While picking individual stocks can lead to higher returns, you must do a lot of research to find those opportunities and get the timing right. Plus, you’re putting your eggs in just a few baskets.
Diversified funds spread out your risk, ideally giving you enough peace of mind that you don’t have to check your portfolio each day.
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What retirees should keep in mind
Index investing can make sense throughout your life, but when you’re nearing retirement and want to take some risk out of the equity portion of your portfolio, it can be an especially good time to switch from individual stocks if you own them to an index fund.
Simple, low-cost index funds make investing simple. They often make sense for investors who want broad market exposure and the ability to focus their time elsewhere.
