Fewer active managers outperformed index funds last year: Morningstar

A smaller share of actively managed mutual funds and exchange-traded funds outperformed index-based funds in 2025 than in the previous year, according to a new study. Still, both types of investments can be included in a portfolio, financial advisors say.

“I don’t treat passive[funds]and active[funds]as competitors,” said Mike Casey, a certified financial planner and founder and president of AE Advisors in Alexandria, Virginia. “I treat them as teammates.”

Among active funds helmed by professional investment managers, 38% outperformed passive funds in 2025 after accounting for fees, down from 42% in 2024, according to Morningstar’s semiannual Active/Passive Barometer. This analysis evaluated the performance of 9,248 funds.

While it’s not uncommon for active funds to miss their targets, with the study showing only 21% survived and won over the decade to 2025, there was variation in whether investment categories outperformed or underperformed.

For example, 64% of diversified emerging market funds outperformed passive funds, up 42 percentage points from 22% in 2024, Morningstar found. Conversely, only 12% of actively managed real estate funds are ahead of the curve, down 54 points from 66% in 2024.

Among active bond funds surveyed, 40% outperformed passive bond funds. However, this is down from 64% in 2024. Still, the 10-year success rate is 42%, which is higher than all categories tracked in the report.

While it’s impossible to predict what stocks and bonds will do this year, or what specific sectors will do, many financial advisors say there are parts of the market where passive index-based investing makes more sense and parts where active management is better suited.

Many advisors use passive funds to keep core costs low and add active strategies in areas where risk management, diversification, or investment selection can improve risk-adjusted returns. Passive funds track an index. That is, its performance is generally similar, for better or worse, to that of the underlying index.

Passive funds “work best when markets are most efficient and costs matter most,” Casey said.

Fees are important because even small differences can add up over decades of investing.

For example, according to the Securities and Exchange Commission, an investor who starts with $100,000 at 4% annual interest will have about $208,000 after 20 years with a 0.25% fee, compared to $179,000 with a 1% fee. The difference is 29,000 yen.

At the end of 2025, the average expense ratio for passive ETFs (expressed as a percentage of assets) was 0.135%, and the average for passive mutual funds was 0.058%, according to Morningstar. In comparison, active ETFs have a rate of 0.42% and active mutual funds have a rate of 0.57%.

“Low fees have been very important for decades,” said CFP Patrick Huey, owner and principal advisor at Victory Independent Planning in Naples, Florida.

Morningstar’s report also found that over the decade ending in 2025, about a third (31%) of active funds in the cheapest quintile of their respective categories outperformed the average passive fund, compared with 17% of the most expensive funds.

Active funds can earn higher fees in inefficient areas of the investment world, where “skilled managers can add real alpha,” Casey said. Alpha is the return in excess of the benchmark return.

Huey said passive funds are ideal in a variety of scenarios, including core market exposure. This includes U.S. and global stocks and investment-grade bonds, he said.

For retirement savers in their 30s or 40s, “you can build a large portion of your portfolio in passive funds and still do very well,” he said.

But this changes with age, he said.

“The closer you get to retirement, the more important it becomes because you can’t accept the fluctuations in the general index,” Huey said. “Once you start making withdrawals, your risk profile changes.”

That’s when active management is worth the higher fees, Huey said. “Active fixed-income and equity managers can shorten (bond) duration, raise capital, or even become defensive when the conditions are right,” he said.