Fewer active managers beat index funds last year: Morningstar

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A smaller share of actively managed mutual funds and exchange-traded funds outperformed their index-based counterparts in 2025 than in the prior year, according to new research. Even so, both kinds of investments can have a place in your portfolio, financial advisors say.

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

Active vs. passive fund performance

Among active funds — those with professional investment managers at the helm — 38% beat their passive peers in 2025 after accounting for fees, down from 42% in 2024, according to Morningstar’s semi-annual Active/Passive Baromoter. The analysis evaluated the performance of 9,248 funds.

While it’s not unusual for active funds to miss the mark — just 21% of them survived and came out ahead over the 10 years ending in 2025, the research shows — there were shifts in which investment categories outperformed or fell short.

How to use active and passive funds

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

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

Fees matter because even small differences compound over decades of investing.

For illustration: An investor starting with $100,000 who earns 4% annually would have about $208,000 after 20 years with a 0.25% fee, versus $179,000 with a 1% fee, according to the Securities and Exchange Commission. That’s a $29,000 difference.

“I don’t treat passive and active [funds] as rivals. I treat them as teammates.

Mike Casey

Founder and President of AE Advisors

At the end of 2025, passive ETFs had an average expense ratio — expressed as a percentage of assets — of 0.135%, while passive mutual funds had an average of 0.058%, according to Morningstar. That compares to 0.42% for active ETFs and 0.57% for active mutual funds.

“Low fees matter enormously over decades,” said CFP Patrick Huey, owner and principal advisor with Victory Independent Planning in Naples, Florida.

The Morningstar report also found that over 10 years through 2025, about a third — 31% — of active funds in the cheapest quintiles of their respective categories beat their average passive peers, compared with 17% for the priciest funds.

Active funds, Casey said, can earn their higher fees in less efficient corners of the investment world “where skilled managers can add real alpha.” Alpha is the return in excess of the benchmark’s return.

Consider the retirement factor

Passive funds are ideal in various scenarios, including for core market exposure, Huey said. That includes U.S. and global equity, as well as investment-grade bonds, he said.

For retirement savers in their 30s or 40s, “you can build most of the portfolio out of passive funds and be in very good shape,” he said.

However, he said, this changes as you age.

“The closer you get to retirement, the more it begins to matter because you just can’t accept the volatility of the general index,” Huey said. “Once you start taking withdrawals, the risk profile changes.”

That’s when active management can be worth its higher fee, Huey said. “Active bond and equity managers can shorten duration [of bonds], raise cash or tilt defensively when conditions warrant,” he said.