If you’re like me, you’re probably in the midst of tax preparation and pouring over year-end brokerage account statements. The odds are decent that they brought some good news for a change: If you’ve had the courage to stay invested in US equities the past decade, 2010 was likely the year you saw your U.S. equity portfolio move back into the black after recovering from the sharp market declines in 2008.

Looking back at all of my statements got me wondering about how investors fared during the past 10 years if they pursued an active investment strategy during this time period versus an index approach.   It hasn’t been easy for either strategy to make money in the markets over the last decade, but some passive investments have had an edge.

Let’s take a look at the iShares S&P 500 index fund (IVV) – which tracks one of the most popular large cap benchmarks – to see how it fared.  Over the course of the last decade, IVV outperformed 74% of other large cap blend funds before taxes and 76% after taxes.  Please click here for standardized performance for IVV.

It may sound surprising that an index fund could outperform its active counterparts on that large of a scale, but when you analyze it further, it’s not a total shock.  For one thing, utilizing an index approach generally ensures that portfolio turnover is less than when using an active strategy.  This can make for relatively lower trading costs (which directly impact fund performance).  Also, due to its ETF structure, IVV has not paid out a capital gain distribution in a decade – another cost that affects the bottom line.  And, like many index products, IVV’s 0.09% expense ratio is relatively low when compared with most active mutual funds.  In fact, IVV actually tracked its index so closely that it made up for part of its expense ratio, returning 1.35% over the past 10 years vs. 1.41% for the index – a 0.06% performance difference.

This is not to say that it’s impossible to find an active manager that can outperform its benchmark – clearly in the IVV versus large cap blend funds example above there were many who did, and some by wide margins.  But if finding a winning active strategy or manager is difficult, finding one over longer periods has required both careful selection and changes to keep up with outperformance.   According to the Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA), the funds that outperformed their benchmarks have historically changed regularly (and randomly), so in theory even when you select the right fund one year, over the course of a decade, you would have to keep making new picks—potentially incurring higher costs and taxes along the way.  For some investors, having a blended approach that includes a core passive exposure like IVV alongside your favored active manager can reduce the risk of underperformance and unexpected tax consequences.

For more information, check out the iShares Performance Perspectives piece on iShares.com.

Sources: Standard & Poors, Bloomberg. 10-year period ending 12/31/10. Percentages are survivorship adjusted and account for merged and liquidated funds over the time period. Analysis is based on the oldest share class of active open-end mutual funds to avoid double-counting of multiple share classes. After tax calculations are based on a 35% investor tax rate assumption for income and short-term capital gains and a 15% investor tax rate assumption for long-term capital gains. Actual after-tax performance depends on the investor’s tax situation and may differ. Past performance does not guarantee future results.

For information on the differences between iShares ETFs and mutual funds, please click here.

Transactions in shares of ETFs will result in transaction expenses and will generate tax consequences. ETFs are obliged to distribute portfolio gains to shareholders.