Active vs. Passive Funds by Investment Category

Active investing strategies often come with higher expenses for manager skills and involvement. Over the past decade, inflows have tilted toward passive funds as investors seek out cost-effective and broad market exposure.

But some active funds are worth the premium in fees and expenses.

Based on first-half 2024 data, Morningstar’s investment research assesses the long-term success rates of active funds compared with passive funds. Here are the categories where active management stood out and where it fell short.

For the full breakdown, download the free Active vs. Passive Barometer report.

In 2024, total assets in US passive mutual funds and ETFs surpassed those in active ones for the first time. Recent data reflects a bigger trend.

Passive funds have attracted more inflows than active funds for the past nine years, according to Morningstar fund flow data.

Elsewhere, passive long-term strategies aren’t as well established. Outside of the United States, passive strategies only make up 26% of assets under management.

Our researchers used Morningstar’s comprehensive fund data to calculate a category’s success rate, or the percentage of active funds that survived and outperformed a composite of passive funds over time.

Why a composite?

This “benchmark” reflects the net-of-fees performance of investable passive funds. It factors expenses into analysis for a more parallel look at trends in active-fund success.

The report spans nearly 8,326 unique funds with approximately $21 trillion in assets, or about 72% of the US fund market, at the midpoint of 2024.

It was basically a coin flip whether an actively managed mutual fund or ETF outperformed its average passive peer from July 2023 through June 2024. About 51% of active strategies survived and beat the average passive fund in their Morningstar Category over that span, a tick up from their 47% success rate in 2023.

Overall, actively managed funds did little to change their long-term track record. About 29% of them survived and beat their average indexed peer over the decade through June 2024.

The US large-cap market has been particularly challenging for active managers due to its competitiveness and representative indexes. Just 20% of them survived and beat their average passive rival over the decade through June 2024.

All three large-cap categories saw negative median 10-year excess returns for surviving active funds, and the distribution of excess returns skewed negative. That indicates the penalty for picking a poor active fund normally exceeded the reward for picking a good one.

A few other active fund categories fell behind their passive counterparts in the last year:

• Foreign equity funds.
• Mid-cap funds.

The full Active/Passive Barometer report explores the details.

Don’t declare passive investing the winner yet.

Active fund performance varies across investment categories and periods. In some regions, they remain the dominant approach in assets under management.

June 2024 concluded a stellar 12-month run for active bond managers. Roughly two out of every three beat their average passive counterpart, led by a 72% success rate in the intermediate core-bond category.

Intermediate-core bond funds invest primarily in investment-grade US fixed-income debt with 2–10-year durations. Active portfolios in this space tend to sport shorter duration and take more credit risk than indexed peers. This proved to be an ideal combination amid the higher-than-expected interest rates and narrowing credit spreads that characterized the period.

In markets that aren’t as widely followed, portfolio managers may have an edge in expertise. Over the decade through June 2024, 51% of actively managed real estate funds survived and beat their average passive peer, making it the only category group whose 10-year success ratio exceeded 50%.

Actively managed real estate funds continued their recent winning ways in the last year. Their 66% one-year success rate mirrored last year’s figure and further bolstered their solid long-term results.

Differences in performance between US and ex-US real estate securities cause active managers’ success rates to ebb and flow. Some category funds invest exclusively outside the United States, while others are more global.

Small-cap territory has been relatively kind to active managers in the long term.

That may be because the small-cap market is less efficiently priced. Active managers may have more opportunities to find mispriced stocks in markets where information is less accessible.

Nearly 38% of active funds succeeded there over the past decade, a higher rate than the US large-cap, US mid-cap, and foreign-stock cohorts over the same span. The wide dispersion of small-cap fund performance—both active and index-tracking—can spark volatile short-term results, but the longer-term signal has remained intact.

The Active/Passive Barometer helps investors calibrate the odds of succeeding with active funds in different categories.

From there, how do you pick the winners to buy?

High tracking error and active share don’t guarantee superior performance but do offer one way for active funds to justify their fees. Some active funds closely replicate the asset weightings of an index fund, but at a higher price point.

Divide a fund’s active share or tracking error by its expense ratio and compare it to a custom benchmark or peer group.

This gives you one indicator of the difference between an active fund and its cheaper passive alternatives.

When evaluating active managers, our researchers consider factors such as the people managing the portfolio, their process, and whether the parent firm aligns its interests with investors.

With interactive research, portfolio managers can perform complex analyses faster than ever.

• The Portfolio Manager Handbook shows a holistic picture of a portfolio manager’s career, including strategies managed over time and how those strategies performed compared with peers during the manager’s tenure.
• The Investment Research Assistant helps investors discover features that differentiate a strategy from its peer group and benchmark.
• U.S. Fund Fee Trends shows trends in the universe of US mutual funds and ETFs.