>Point two is double edged, it also picks all losers.
Not really. Standard and Poors evaluates the top 500 on a quarterly basis. The losing stocks are naturally purged from such index funds on a regular basis.
They can only pick them after they have already lost.
In any case, broader index funds / indices that don't eliminate users as quickly (basically, only when they stop trading on public markets), don't do worse. So the mechanism you describe is pretty much irrelevant to the success of index funds.
And so is the implied mechanism of 'picking all the winners'.
And the index fund “trick” works just as well with total market indices (mainly because the total market return is those same ten percent captured by the S/P 500).
Not really. Standard and Poors evaluates the top 500 on a quarterly basis. The losing stocks are naturally purged from such index funds on a regular basis.