Indexed options in your super fund: Pros and cons

In many ways, superannuation and passive investing are a good match. As super is a long-term investment, index options offer members an efficient, low-cost way to achieve market returns. While markets can be volatile in the short term, in the long run they tend to rise.

What are the pros and cons of indexing?

1. Benefits of indexing

• Better diversification – Investing in all or a representative sample of a market index provides a diversified portfolio and reduces the risk that comes with holding only a small number of investments if one or more of those investments is a dud.
• Simple and transparent – It is much easier to follow a set index than an active manager’s unpredictable investment decisions.
• Reduced volatility – Buying and holding assets over the longer term typically reduces volatility and improves your returns.
• Lower-cost returns – Picking investment winners consistently is difficult, so indexing provides a low-cost way to achieve market returns, which tend to increase in the long run.
• Reduced investment costs – By tracking the index, there are fewer of the normal transaction and brokerage costs associated with regularly buying and selling assets.
• Lower management fees – Tracking the performance of an index means you are not paying for teams of highly paid ‘star’ investment managers.
• Tax efficiency – With indexing, your after-tax position may be better due to a reduced level of trading and lower capital gains tax obligation.

2. Drawbacks of indexing

• No downside protection – Indexes represent the performance of a market, so if that market declines, your investment in it will too. Active managers may be able to limit this by hedging or moving to cash.
• Over-representation of assets – If an asset becomes overvalued, it carries more weight in the index, but the index manager must still hold the asset.
• No control over the holdings – Indexing requires the manager to hold certain assets to replicate the index, so you have no control over which assets you invest in.
• No potential for higher returns – Index funds cannot outdo the market the way an actively managed fund may do, as their job is to replicate – not exceed – the market’s performance. Active management offers the possibility of higher returns – a feat seldom achieved in practice.
• Lack of transparency – Some funds are more transparent than others. For example, some funds either don’t disclose the index or index manager they are using, or they make it very difficult to find the information on their websites.

Research in Australia and overseas has consistently found that most active managers fail to consistently beat the market or achieve better returns than their benchmark index in the long run, particularly after tax.

For example, the 2025 SPIVA Australia Scorecard found 85% of general Australian share fund managers were outperformed by the S&P/ASX200 Index over the 15 years to June 2025. International shares, Australian mid- and small-cap shares, Australian bonds and A-REIT (Australian listed property) fund managers also underperformed their benchmark indexes over 10- and 15-year periods. Even over shorter periods of one, three and five years, only active Australian bond funds stood a better than 50/50 chance of beating the index.

Super funds use indexing to maximise the diversification of their investment portfolios and to reduce their investment risk. Buying and holding investment securities for a long period – rather than regularly trading them – also reduces your fund’s investment costs and helps boost the returns you receive in your super account.

Some super funds blend active and passive investment strategies in a core-plus-satellite investment approach. This involves investing the core of the fund’s portfolio using index strategies, while the remainder is invested in a series of actively managed satellites that the fund hopes will provide members with higher returns.

Indexed investment options in super: What’s on offer?

Many large super funds and platforms offer indexed options to their members in both the accumulation phase and retirement phase.

Like their actively managed cousins, the passively managed or index-invested options offered by super funds come in several forms:

1. Pre-mixed investment options

A pre-mixed indexed investment option is a mix of growth and defensive assets selected with the expectation that they will deliver an investment return in line with a pre-set benchmark index over all time periods.

Pre-mixed index investment options generally use labels such as Balanced, Growth, High Growth, Defensive or Conservative, and often sit alongside actively managed options with the same label.

2. Single asset classes

These are indexed investment options that track a benchmark index for a specific asset class, such as Australian and international shares, bonds and property.

3. Lifecycle funds

A lifecycle fund is an indexed investment option that automatically adjusts its investment mix (or asset allocation) according to the member’s age. They hold a higher level of growth assets when you are younger and gradually reduce risk by increasing exposure to defensive assets as you age. The underlying investment assets are passively managed in the same way as pre-mixed and single-asset class options.

Who’s offering indexed investment options?

Many of the major industry and retail super funds offer both their accumulation and pension members indexed investment options.

Industry fund heavyweights like AustralianSuper, Australian Retirement Trust (ART), Hostplus, REST, Aware Super and Cbus offer various indexed options.

Large retail super funds such as AMP’s MyNorth, CFS FirstChoice, Mercer Super, and platforms such as HUB 24 and Netwealth also offer super fund members a wide range of indexed investment options.

Increasingly, many super funds are offering their members direct investment options. These allow you to select and invest directly in ETFs, which are another way to access indexed strategies.

Several smaller entrants to the super market (such as Virgin Money Super, Spaceship, Superhero Super and Stockspot Super) offer fund members the opportunity to invest their super using low-cost indexed strategies.

It’s worth noting, however, that the investment options offered by these newer super funds usually invest through ETFs or the large indexed managed funds offered by the international specialist index fund managers, such as Vanguard, BlackRock and BetaShares. For example, Stockspot is an ETF-only super fund, offering a mix of active and passive ETF investments.

The bottom line

If you are looking for an easy-to-understand and cost-effective investment option for your super, an indexed investment option may be worth considering. However, you should always check the underlying indexes, investments and fee structure, just as you would with any other super investment option.