The main pros of index investing are low fees, wide diversification in one purchase and very little upkeep. The main cons are that you take the market’s full falls, your money is concentrated in whatever is largest, and you will never beat the market. Which side matters more depends on how long you can stay invested and how you react when prices drop.
Below is the list, with the fee maths worked through on S$100,000 and the downsides stated as plainly as the upsides. If you are new to the idea, start with what index investing is.
The Pros of Index Investing
1. Low, predictable costs. Broad index ETFs charge a yearly total expense ratio (TER) well below most active funds. MoneySense says TERs on similar ETFs tracking the same index range from about 0.03% to over 0.5% a year. Active unit trusts, by MoneySense’s figures, usually have TERs of 1% to 2.5%.
2. Diversification in one purchase. A single STI fund holds 30 companies; a world fund can hold more than 1,600. One company’s failure moves the fund only by its weight.
3. No manager risk. You are not relying on one person or team making the right calls. The fund follows a published rule.
4. Transparent. You can see what the fund holds on its factsheet, usually daily or monthly.
5. Hard to beat after costs. S&P Dow Jones Indices found that 91.03% of all US large-cap funds trailed the S&P 500 over the 20 years to 30 June 2025. That is one market and one period, but it is the main reason index funds have grown.
6. Little effort. No company research and fewer decisions, which also means fewer chances to act on fear or excitement.
The Cons of Index Investing
1. You get every fall. An index fund stays fully invested by design. MSCI records a maximum drawdown of 58.38% for the MSCI ACWI between 31 October 2007 and 9 March 2009.
2. Concentration in the biggest companies. Market-cap weighting puts the most money into the largest firms. The three local banks were 57.25% of the SPDR STI ETF on 12 November 2026, and US companies were 64.63% of the MSCI ACWI on 30 October 2026.
3. You will never beat the market. The aim is the market’s return minus costs. If you want a chance to do better, you need a different approach, with the higher costs and risks that come with it.
4. No say in what you own. If a company you would rather avoid is in the index, you own it.
5. Currency risk on foreign funds. A US or world fund moves with the US dollar against the Singapore dollar. See investing in the S&P 500 from Singapore.
6. Not every “index fund” is cheap or broad. Sector, thematic and leveraged ETFs also track indices. Our guide to sector, thematic and leveraged ETFs explains why they behave differently.
Index Investing Pros and Cons: The Fee Maths
Illustration only, not a guarantee. S$100,000 is invested once and left for 20 years. We assume the investments earn 5% a year before costs, every year, and that costs are taken off that return. No further money is added, and tax, trading costs and currency moves are ignored.
| Total yearly cost | Return after costs | Value after 20 years |
|---|---|---|
| None (for reference) | 5.0% | About $265,300 |
| 0.2% | 4.8% | About $255,400 |
| 1.5% | 3.5% | About $199,000 |
The 1.3-point gap in yearly costs leaves the higher-cost investor about $56,400 behind. That is more than half the original sum, and it is lost whether markets rise or fall.
Real returns will not be a steady 5%. Some years will be negative. But costs are the one part of the result you know in advance. Test other figures in our compound interest calculator.
The short version: cost is the most reliable advantage of index investing, and full exposure to market falls is its most reliable drawback. Both compound over time.
Side by Side
| Index fund | Active fund | |
|---|---|---|
| Aim | Match the index, minus costs | Beat a benchmark |
| Typical yearly cost (MoneySense) | About 0.03% to over 0.5% for ETFs | Usually 1% to 2.5% TER for unit trusts |
| In a falling market | Falls with the index | May hold cash or defensive shares; no guarantee |
| What you need to judge | Index, cost, tracking | Manager’s skill and whether it lasts |
Our index funds vs active funds article looks at the evidence and when people still choose active management.
Who Index Investing May Not Suit
- People who need the money within a few years. A large fall may not have time to recover.
- People who would sell after a 30% drop. Selling locks in the loss.
- People who want a guaranteed income. Fund distributions vary and can be cut.
For short-term money, see T-bills, Savings Bonds and fixed deposits compared.
What To Do Next
- Write down what you would do if your investment fell by 40%. If the answer is “sell”, consider a smaller amount or a mix with bonds.
- Compare the total yearly cost of any fund you consider, not just the management fee. Our guide to expense ratio, tracking error and spreads shows how.
- Read the fund’s prospectus and product highlights sheet before you buy.
- Check that the broker or platform is listed in the MAS Financial Institutions Directory.
- This is general information, not advice on your situation.
