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Active funds “struggled mightily” to beat their index fund counterparts over the past year, according to a recent Morningstar report.
That happened even amid market gyrations tied to tariffs and geopolitics — the kind of volatile periods during which active managers typically claim to outperform, said Bryan Armour, director of ETF and passive strategies research for North America at Morningstar.
Just 33% of actively managed mutual funds and exchange-traded funds had higher asset-weighted returns than their average index counterparts from July 2024 through June 2025, after accounting for investment fees, according to a Morningstar report published in August.
That’s a drop of 14 percentage points from the prior year, it found.
Active funds don’t capitalize on ‘roller coaster’
Money managers who use active management pick stocks, bonds and other financial assets that they think will beat the broad market.
By contrast, index funds don’t employ stock-picking; they track the market instead of trying to beat it.
An oft-touted selling point of active managers is stock pickers’ ability to make key trades in volatile periods to beat investors who passively ride the market’s ups and downs.
However, data has generally disproven that thesis, Armour told CNBC.
“Elections, executive orders, tariffs, and geopolitical risks made for a roller-coaster ride during the 12 months through June 2025,” he wrote last month. “Conventional wisdom says active managers should better manage those complexities, but performance says otherwise.”
The trend holds over the long term, too.
Just 21% of active strategies survived and beat their index counterparts over the 10 years through June 2025, Morningstar found.
Success varies by sector
Of course, success varies greatly by sector, data shows.
For example, index U.S. large-cap stock funds — such as ones that seek to track the S&P 500 index — almost always beat their actively managed counterparts over the long term, Armour said.
Just 14% of actively managed U.S. large-cap funds have beaten the S&P 500 over the past 10 years, according to SPIVA.
In addition to having low success rates, large-cap active funds can also carry steep penalties for picking a loser, Armour said. In other words, when they underperform their benchmark, that underperformance is relatively large.
Conversely, active managers generally fare better in less liquid areas of the market, like fixed income, real estate, and small-cap and emerging-market stocks, Armour said.
For example, 43% of actively managed high-yield bond mutual funds and ETFs beat their index counterparts in the past 10-year period, according to Morningstar.
Fees are the key
Fees are the key driver of index funds’ success when compared to active funds, Armour said.
Index funds carry a 0.11% average asset-weighted annual fee, while active funds carry a 0.59% fee, according to Morningstar.
Active funds need to have higher relative returns just to overcome that fee differential.
Beyond that, higher fees also eat into investor earnings. For example, an investor with $100,000 who earns 4% per year and pays a 0.25% fund fee would have $208,000 after 20 years, while the same investor paying a 1% fee would have $179,000, or $29,000 less, according to the Securities and Exchange Commission.
Since index funds own all the securities in a broad market index, they are guaranteed to own the relative winners and losers. While active managers may own more of the winners than their index counterparts, they also risk missing out, Armour said.
Many active managers took risk off the table in April when President Donald Trump first announced so-called “reciprocal” tariffs, but the market then proceeded to rebound quickly, Armour said.
