Index investing is an investment strategy that aims to replicate the performance of a specific market index or segment and provide broad market exposure at a low cost. And what makes it popular is really a combination of the low cost, the predictable returns and the additional transparency that it provides versus something like an active manager. In addition to that, a lot of investors have found index funds to be popular because of their ability to outperform active funds on average and the challenges that active funds have in beating market returns. This, combined with the growth of index funds and ETFs, as well as the accessibility provided through robo-advising and online investment platforms, is really seen a growth in the popularity of index funds.

Zero sum game theory is this idea that for every winner there is a loser. So if you're looking at all the investment funds in the world and looking at their performance, if you see one fund that outperforms in a particular period or a particular market, there's going to be another fund that underperforms. And on average, these returns are distributed around the average market return.

And this means that it's very difficult for any fund to consistently beat the market, because for every fund that exists, it's going to be one from the beats and one fund that loses before costs. When we introduce costs that shifts that entire distribution down. And so the fraction of funds that are underperforming the benchmark is going to increase as costs increase.

And that's a huge benefit for index funds, which are typically lower cost so index funds or low cost investments are typically going to outperform the average high cost active fund just because of the cost aspect. But also given the difficulty in those funds actually managing to beat the benchmark on average anyway.

Costs are important because anything that takes away from the value of your fund compounds over time and ultimately leaves you with less money in the bank at the end of the day. So, if you think about the costs that you incur in funds, whether that’s spreads, taxes, investment fees, all of those add up and detract from the amount of money that is being invested, the performance that you're getting on a day-to-day basis.

And so low cost funds, like index funds, typically provide you with more of your money back to invest in the portfolio in coming months, versus a higher cost fund where a greater fraction of the performance is going to be taken up upfront by those costs, giving a higher burden, a higher hurdle for those funds to reach in order to outperform.