Have Index Funds Buoyed US Large Caps?
US large-cap outperformance likely isn’t driven by index fund flows alone, as indexing is widespread globally without similar international results.
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?
Indexing became the majority share of US equity mutual fund and ETF assets under management years ago, representing about 64% of assets as of September 30, 2025. But indexing is not just popular for US stocks. About 57% of non-US stock AUM is in index funds. And yet, large cap international stocks, represented by the MSCI World ex USA Index, have returned 8.41% over the last 10 years, 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
Annualized Returns (%)
Periods ending September 30, 2025
Glossary
- Annualized return: The compound performance of an investment expressed on a per-year basis.
- Large cap: Refers to a company with a relatively large market capitalization.
- Size premium: The return difference between small capitalization stocks and large capitalization stocks.
Disclosures
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing, or other such legal requirements within the jurisdiction.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
CANADA
These materials have been prepared by Dimensional Fund Advisors Canada ULC. The other Dimensional entities referenced herein are not registered resident investment fund managers or portfolio managers in Canada.
This material is not intended for Quebec residents.
Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise noted, any indicated total rates of return reflect the historical annual compounded total returns, including changes in share or unit value and reinvestment of all dividends or other distributions, and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
Resources
