Stock Market Index

• The S&P 500 index is widely considered an average performance representation for the stock market as a whole in the United States. To measure fund performance, fund managers and their investors often compare fund returns with the S&P 500 index. If over time a fund fails to beat the market with its stock selections, investors would be better off to invest in all stocks in the market indiscriminately to achieve the average market return. Index funds that track all stocks in a particular index will generate the market return for investors who are more concerned about their funds underperforming the market.
  
  

Actively-Managed Funds

• While some investors worry more about the potential downside of their fund performance, other investors care more about the likely upside of their fund performance. The only way to outperform the market is for fund managers to pick and choose stocks whose performances are expected to be above the average market performance. Contrary to index funds that track the market performance, actively managed funds strive to outperform the market. However, funds may miss their targets if their selections consist of too many underperforming stocks, the potential downside that index investors try to avoid.
  
  

Performance and Fees

• Fund management is at an inherent disadvantage competing against the stock market because of the cost they incur running any fund. Fund fees charged by fund management are ultimately subtracted from fund returns, while the market return doesn't take into account any transactional deductions. Therefore, for fund performance to outrun the stock market, funds must achieve an extra return at least equal to the amount of fund fees. Therefore, even an index fund can never truly match its performance with the stock market unburdened by any fees.
  
  

Return and Dividends

• Stock market indexes often include dividend reinvestment as part of their total return calculations. The dividend issue is another challenge facing fund management that tries to achieve a better-than-market fund performance. Some stocks pay dividends and others don't. For actively managed funds, the more non-dividend stocks fund management chooses, the larger potentially negative impact they have on fund total returns. But there might also be potential trade off between dividends and price appreciation -- dividend reinvestment by companies may lead to future grow in the value of their stocks.