Gross market return - Cost = Net market return This syllogism then becomes obvious: 1. All investors own the entire stock market, so both active investors (as a group) and passive investors—holding all stocks at all times—must match the gross return of the stock market. 2. The management fees and transaction costs incurred by active investors in the aggregate are substantially higher than those incurred by passive investors. 3. Therefore, because active and passive investments together must, by definition, earn equal gross returns, passive investors must earn the higher net return. QED.
