Naturally, many investors are inclined to ask, “Why not invest in an actively managed fund that does beat its index?” In short: because it’s hard — far harder than most would guess — to predict ahead of time which actively managed funds will be the top performers.

In addition to their “indices versus active” scorecards, Standard and Poors also puts out “persistence scorecards” from time to time. In the most recent one (published June 2017), they found that of the funds that had a top-quartile ranking for the five years ending March 2012, only 22.43% maintained a top-quartile ranking for the following five-year period. Pure randomness would suggest a repeat rate of 25%. In other words, picking funds based on superior past performance proved to be no better than picking randomly!

In another study, Morningstar’s Russel Kinnel looked at the usefulness of expense ratios and star ratings (which are based on past performance) at predicting future performance. Kinnel summarized his findings:

Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.  Stars can be helpful, too, particularly in identifying funds that might be merged out of existence.

In other words, past performance can be useful for identifying future poor performers. (That is, the worst performing funds tend to continue to perform poorly, and they are often shut down by the fund company running them.) But if you’re looking to pick a future top performer, picking a low-cost fund is your best bet. And looking for low-cost funds naturally leads to the selection of index funds as likely top-performers.