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Have Index Funds Buoyed US Large Caps?
In our last installment, we noted that the negative average size premium in the US over the past decade was mainly a reflection of the S&P 500 Index returning well above its long-run average. That’s led some people to wonder why the large cap index has fared so well. Many have laid this at the feet of index fund popularity, suggesting flows to these funds have imparted an upward bias to market prices and lifted US large cap stock indices. But if index fund flows are to blame, why aren’t we seeing the effect internationally?
US large cap funds have been dominated by indexing for some time, for example 64% of US equity mutual fund and ETF assets under management (AUM) were indexed as at 30 September 2025. But indexing is not just popular for US stocks. Looking at the same universe of funds,1 about 57% of non-US stock AUM is in index funds. And yet, large cap stocks in developed markets outside the US, represented by the MSCI World ex USA Index, have returned 8.41% over the last 10 years or near dead-on with their 8.67% return since 1970.
This is not to suggest index funds lack impact on markets. For example, research shows rebalancing during index reconstitutions can push prices of securities being added or deleted from the index. But the large cap index comparison suggests index fund flows are probably not the sole driver of the S&P 500’s recent outperformance.
exhibit 1
Annualised Returns (%)
Periods ending 30 September 2025
Past performance is not a guarantee of future results. Actual investment returns may be lower.
Glossary
Annualised return: The compound performance of an investment expressed on a per year basis.
Large cap: Stocks with a relatively large market capitalisation.
Size premium: The return difference between small capitalisation stocks and large capitalisation stocks.
Footnotes
- 1. The share of AUM quoted for US equity mutual funds and ETFs and non-US equity mutual funds and ETFs considers US-domiciled ETFs and mutual funds.
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