Over the past year, actively managed funds have once again fallen short of their passive counterparts, according to a new Morningstar report — a surprising outcome given the volatile market conditions that typically favor active strategies.

From July 2024 through June 2025, only 33% of actively managed mutual funds and exchange-traded funds (ETFs) delivered higher asset-weighted returns than comparable index funds after accounting for fees. That figure represents a sharp 14-percentage-point drop from the previous year, underscoring the challenges active managers continue to face despite market turbulence.

Market swings fail to favor active managers

Active fund managers aim to outperform the market by selectively buying and selling stocks, bonds, and other securities. In contrast, index funds take a more passive approach — they simply mirror a benchmark, such as the S&P 500, without trying to outguess it.

Periods of economic uncertainty and political tension — like those seen recently with trade tariffs, elections, and shifting geopolitical alliances — are often touted as times when active managers can demonstrate their expertise. Yet, the data tells a different story.

“Elections, executive orders, tariffs, and geopolitical risks made for a roller-coaster ride during the 12 months through June 2025,” noted Bryan Armour, Morningstar’s director of ETF and passive strategies research for North America. “Conventional wisdom says active managers should handle those complexities better, but performance shows otherwise.”

Morningstar’s long-term data paints a similar picture. Only 21% of active strategies both survived and outperformed their index counterparts over the decade ending in June 2025.

Sector-by-sector performance gaps

The degree of underperformance varies by sector. U.S. large-cap stock funds — those that track indexes like the S&P 500 — continue to be particularly difficult for active managers to beat. According to SPIVA data, just 14% of active U.S. large-cap funds outperformed the S&P 500 over the past 10 years.

When these funds fall short, they tend to underperform by a wide margin, amplifying the penalty for poor stock selection.

However, there are areas where active management still shows relative strength. Less liquid markets — such as fixed income, real estate, small-cap, and emerging-market stocks — offer more opportunities for skilled managers to find inefficiencies. For instance, Morningstar found that 43% of actively managed high-yield bond funds and ETFs surpassed their index-based competitors over the past decade.

The role of fees in long-term outcomes

A major reason index funds continue to dominate is cost. The average asset-weighted annual fee for an index fund is 0.11%, compared with 0.59% for active funds, Morningstar reports. That difference in expenses means active managers must generate significantly higher returns just to match passive performance — a hurdle most fail to clear.

Even small fee differences compound over time, eating into investor gains. The U.S. Securities and Exchange Commission offers a clear illustration: an investor who starts with $100,000, earns 4% annually, and pays a 0.25% fund fee will have about $208,000 after 20 years. The same investor paying a 1% fee would end up with only $179,000 — nearly $30,000 less.

Risk management and missed opportunities

Because index funds hold all securities within a benchmark, they are guaranteed exposure to both the winners and losers in the market. Active managers, by contrast, may overweight successful assets but risk missing entire rallies if they step to the sidelines at the wrong time.

Morningstar noted one such instance earlier this year: many active managers reduced risk in April when then-President Donald Trump announced new “reciprocal” tariffs. Markets quickly rebounded, leaving those who moved to cash or safer assets trailing behind.

In the end, while active management may shine in specific niches, the broader trend remains clear — low-cost index funds continue to outpace their active rivals both in performance and investor returns, proving once again that, in most markets, consistency beats conviction.