Only 38% of active funds survived and outperformed their passive counterparts in 2025, a statistic that sounds like a verdict. But averages can flatten important distinctions, and for a topic like active management, the aggregate number is almost meaningless.
The terrain beneath that headline figure tells an entirely different story.
Zoom into the data and a more complex picture emerges. Diversified emerging market funds posted a 70% success rate that same year, while active fixed income ETFs outperformed passive equivalents across five of nine major bond categories.
Small-cap and mid-cap active managers approached 50% success rates, and institutional investors surveyed by Schroders were actively increasing their allocations to managed strategies.
This article breaks down where active strategies add value, where they fall short, and how the investment vehicle itself shapes outcomes. The goal is to map the terrain, not to advocate for one side.
Why the Overall Success Rate Misrepresents Active Management
Morningstar’s semiannual barometer covers roughly 9,248 unique funds representing approximately $26 trillion in assets, nearly 67% of the entire US fund market. While this breadth makes the data authoritative, it also pools together vastly different categories. The result is a composite number that describes almost nothing with precision.
When the data is separated by asset class, the dispersion is remarkable. Categories where active managers consistently struggle include US large-cap equities, where barely one in four managers outperformed passive peers. Global large-blend funds and corporate bond funds also recorded poor results at various points.
Conversely, other categories showed that active approaches can demonstrably outperform. Intermediate core-plus bond managers hit a 66% success rate, and diversified emerging market equity funds reached 70%.
Small-cap active managers recorded a 49% success rate through mid-2026, a meaningful edge where information gaps create opportunities for skilled stock selection.
According to State Street Investment Management’s analysis of four key trends in the active-passive debate, active fixed-income managers outperformed at nearly twice the rate of their equity counterparts.
About 47% of active bond managers beat their benchmarks, compared to just 32% on the equity side. This divergence is not noise; it reflects structural differences in how information is priced across markets.
Where Markets Are Inefficient Enough to Reward Skill
Market efficiency largely determines whether active management can add value. In highly efficient markets like US large-cap equities, prices rapidly absorb information, leaving little room for managers to find an edge.
This segment is one of the most researched and analyzed in the world, making outperformance exceptionally difficult.
Fixed-income markets operate differently, as bond pricing involves greater complexity, including credit analysis, duration positioning, and liquidity premiums. Many corners of the bond market remain structurally inefficient.
Small-cap equities share similar dynamics, such as lower analyst coverage and more frequent mispricings, creating conditions where research can translate into measurable alpha (returns above a benchmark).
The Vehicle Matters: Active ETFs vs. Active Mutual Funds
An underappreciated shift in portfolio construction is how the same active strategy produces different outcomes in different vehicles. The performance gap between active ETFs and active mutual funds is no longer a minor footnote. It has become a structurally significant trend.
In 2025, active bond ETFs posted a 60% benchmark-beating rate with an average excess return of +0.11%. In contrast, active bond mutual funds managed a 43% outperformance rate and carried a negative average excess return of -0.32%.
Within the intermediate core-plus category, 73% of active ETFs outperformed versus 64% of their mutual fund counterparts.
The reasons for this gap are worth examining. ETFs typically have lower expense ratios than mutual funds, and fee drag is the most consistent predictor of long-term underperformance. Every basis point paid in fees must be recovered through manager skill just to break even with a passive alternative.
Additionally, active ETF inflows reached a record $580 billion in 2025, while active mutual funds saw $640 billion in outflows. Cumulatively, active ETFs have attracted nearly $1.2 trillion since 2015, while active mutual funds have shed approximately $4 trillion over the same period. Investors are voting with their capital.
Fee Drag: The Silent Return Killer
Morningstar’s long-term data confirms that lower-cost active funds outperform their higher-cost peers with striking consistency. Over the ten years through mid-2026, 33% of active funds in the cheapest cost quintile of their category outperformed their average passive peer. For funds in the most expensive quintile, that figure dropped to just 20%.
This matters because fee decisions often feel abstract until compounded over decades. For a US investor in a 401(k) holding an expensive large-cap active fund for thirty years, the fee drag can represent tens of thousands of dollars in foregone returns, even if the manager’s raw performance before fees was competitive.
What Institutional Investors Are Actually Doing
Retail narratives about active versus passive investing often diverge from the actions of sophisticated institutional capital. Schroders’ Global Investor Insights Survey for 2025 found that 68% of North American institutional investors were confident in active management’s ability to add value.
Furthermore, 76% indicated they were likely to increase their active allocations over the next year.
Among those investing in public equities and fixed income, 86% and 88%, respectively, believed an active or blended strategy was better positioned for returns than a purely passive one. Key drivers for this confidence included diversification, responsiveness to uncertainty, and the potential for excess returns.
This is particularly relevant as 80% of these investors flagged the S&P 500’s market concentration risk as a concern.
The survey was conducted in April and May 2025, a period of acute policy volatility. This timing is significant. Institutional investors were navigating portfolio stress in real time and moving toward active strategies, not away from them.
A Framework for Deploying Active Strategies Strategically
Instead of treating active management as an all-or-nothing decision, research supports a more segmented approach. The following breakdown shows where active strategies have historically added value and where they have not.
| Asset Class / Segment | Active Success Rate (Approx.) | Strategic Verdict |
|---|---|---|
| Diversified Emerging Markets Equity | 70% (12 months through mid-2026) | Strong case for active |
| Intermediate Core-Plus Bonds | 66% (active ETFs: 73%) | Strong case for active ETFs |
| Small-Cap / Mid-Cap US Equity | 47–49% | Moderate case for active |
| Active Fixed Income (broad) | 52% (mid-2026 data) | Generally favorable |
| US Large-Cap Blend Equity | 27% | Passive typically preferred |
| Corporate Bonds | Variable (4% in 2025; 34% by mid-2026) | Highly cyclical; proceed selectively |
| Global Large-Blend Equity | 26–33% | Passive generally preferred |
This kind of segmentation reframes the decision entirely. Instead of asking “should I use active or passive,” the more productive question becomes “which segments of my portfolio reward active skill, and which simply reward low cost?”
The Long-Term Track Record Still Sets a High Bar
Over ten years, only 25% of active strategies survived and outperformed their passive peers, a stubbornly low figure. However, this aggregate number conceals important distinctions, as fixed-income strategies showed the strongest ten-year success rates.
For instance, T. Rowe Price’s analysis of two decades of rolling performance data showed its funds outperforming passive peers in 67% of ten-year periods, well above the industry average.
These results matter not as an endorsement, but as evidence that manager selection (specifically identifying research-intensive, lower-cost strategies) remains a key variable. Dismissing all active management based on industry averages is its own form of analytical error.
Key Principles for Applying Active Strategies
Bringing the evidence together, several practical principles emerge for investors building or rebalancing US portfolios in the current environment:
- Prioritize active strategies in fixed income, particularly intermediate core-plus bonds, where structural inefficiencies persistently reward skilled managers.
- Favor active ETFs over active mutual funds in equivalent categories, given demonstrated performance advantages and lower cost structures.
- Apply active approaches to small-cap and emerging market equities, where information gaps create genuine alpha opportunities.
- Default to passive in US large-cap blend strategies, where the cost of active management consistently exceeds the return premium available.
- Monitor fee levels across all active holdings, as cost is the most reliable long-run predictor of relative performance.
- Assess manager consistency over rolling periods rather than single-year snapshots, since frequency of outperformance matters more than isolated strong years.
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Looking Ahead: Where the Active-Passive Debate Is Heading
The structural shift toward active ETFs is more than a product trend. It signals a convergence between the flexibility of active management and the cost and tax advantages of the ETF structure. This convergence is still in its early stages, as assets in active ETFs have grown about 46% annually since 2020, suggesting more room for growth.
Macro conditions in 2025 and 2026, such as evolving monetary policy and inflation uncertainty, are creating an environment where active strategies can add value. Tight credit spreads favor skilled security selection, while rate uncertainty rewards active duration management.
Passive indexes cannot navigate the sector rotation opportunities that emerge from policy volatility.
Furthermore, mid- and small-cap active funds have already begun demonstrating improved success rates in the most recent measurement period.
This suggests the market conditions that reward skill-based investing may be broadening beyond fixed income. These opportunities could be expanding into specific equity segments.
The Smarter Question to Be Asking
Framing the active versus passive debate as a binary choice has always been misleading. It reduces a nuanced allocation decision to an ideological preference, costing investors on both sides. Those who avoid all active strategies miss opportunities in fixed income and emerging markets, while those who use them indiscriminately often pay premium fees for poor returns.
The more useful question is: which parts of a portfolio benefit from human judgment and flexibility, and which parts simply need low-cost market exposure? The data provides clear answers to this question when examined carefully.
Positioning Ahead of the Shift
Active management, examined with precision rather than ideology, is a powerful tool when deployed in the right terrain. The investors who benefit most are not those who choose a side, but those who understand the map well enough to apply each approach where it earns its place.
As macro complexity deepens and market concentration concerns push capital toward more selective strategies, a nuanced, data-driven approach becomes even more critical. Ultimately, smart investing isn’t about picking a side in the active-passive debate. It’s about knowing when and where to deploy the right tool for the job.
Watch this video to learn how active management can help build smarter portfolio returns.
Frequently Asked Questions
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