Active investment managers once again found it difficult to outperform their index fund rivals over the past year, according to a new report from Morningstar. The results challenge the long-standing belief that human stock-picking skills shine brightest in turbulent markets.

Between July 2024 and June 2025, only about one-third of actively managed mutual funds and exchange-traded funds achieved higher asset-weighted returns than their comparable index funds, even after accounting for management fees. That figure marks a steep decline from the previous year, dropping by roughly 14 percentage points.

Morningstar’s director of ETF and passive strategies research for North America, Bryan Armour, noted that the findings are striking because the year was far from stable. Trade tensions, tariffs, and geopolitical uncertainty all caused frequent market swings — conditions that active managers often cite as opportunities to demonstrate their expertise. Yet, the data told a different story.

“Elections, tariffs, and global political developments made for a volatile environment,” Armour wrote. “Conventional wisdom suggests that active managers should be able to navigate such complexity more effectively than index investors. The evidence, however, continues to suggest otherwise.”

Long-Term Underperformance Persists

The struggles of active management are not new. Over the decade ending in June 2025, only 21 percent of active strategies both survived and outperformed their index benchmarks, according to Morningstar’s analysis.

Active fund managers attempt to beat the market by selecting specific stocks, bonds, or other assets they believe will outperform. Index funds, in contrast, take a passive approach — simply tracking the performance of a broad market benchmark such as the S&P 500.

While the appeal of active management lies in the promise of skillful navigation during uncertain times, the results continue to suggest that consistency, rather than timing, remains the key to long-term success.

Sector Differences Show Uneven Results

Performance varies significantly depending on the sector. For instance, actively managed U.S. large-cap stock funds have rarely been able to surpass their passive competitors. According to data from SPIVA, only about 14 percent of active large-cap funds managed to outperform the S&P 500 over the past decade.

Armour pointed out that when these funds underperform, the magnitude of the loss can be substantial, making the cost of a wrong bet particularly painful.

On the other hand, active managers have seen better relative outcomes in areas of the market that are less liquid or harder to track, such as fixed income, small-cap stocks, real estate, and emerging markets. Morningstar’s data shows that roughly 43 percent of actively managed high-yield bond mutual funds and ETFs managed to beat their index counterparts over the last 10 years.

Costs Remain the Deciding Factor

One of the biggest reasons index funds tend to outperform is cost. The average annual fee for an index fund is about 0.11 percent of assets, compared with 0.59 percent for active funds, according to Morningstar. That difference means active funds must generate higher returns just to break even with their lower-cost competitors.

Over time, these fees can make a significant impact on investors’ portfolios. For example, an investor with $100,000 earning an average annual return of 4 percent and paying a 0.25 percent fee would have roughly $208,000 after 20 years. If the same investor paid a 1 percent annual fee, the final amount would fall to around $179,000 — a $29,000 gap.

The lower cost and simplicity of index investing also ensure exposure to all segments of the market — both winners and losers. While active managers might try to overweight the winning stocks, they also risk missing key opportunities when markets rebound unexpectedly.

This was evident earlier in 2025, when many active managers reduced their risk exposure following the announcement of new “reciprocal” tariffs by President Donald Trump. The market, however, recovered faster than anticipated, leaving many of these managers behind.

The Enduring Case for Passive Investing

The findings reinforce a long-term trend: despite periods of heightened volatility, passive investing continues to outperform active management in both performance and cost efficiency. For most investors, index funds remain a reliable and low-cost path to capturing the market’s overall growth, while active managers continue to face the uphill task of proving that their higher fees are worth paying.