Active vs. Passive Funds: Performance, Fund Flows, Fees (2024)

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.

Are active mutual funds and ETFs worth the premium in fees?

Based on 2023 data, Morningstar’s investment research assesses the long-term success rates of active funds compared with passive funds. Here are the categories that stood out and the ones that fell short.

For the full breakdown, download the free report.

In 2024, total assets in US passive strategies surpassed those in active ones for the first time.

This reflects a long-term trend. Passive funds have attracted more inflows than active funds for the past nine years, according to Morningstar fund flow data.

But active ETFs have managed to claim a meaningful slice of the market. While their active fund counterparts have logged outflows year after year, the active ETF market recorded a 37% average organic growth rate in the last decade.

And active ETF inflows show no signs of slowing.

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 8,338 unique mutual funds and ETFs with approximately $18 trillion in assets, or about 55% of the US fund market, at the end of 2023.

In 2023, actively managed mutual funds and ETFs fell short of their passive peers. While notching an improvement over 2022, slightly less than half (47%) of active strategies survived and delivered higher net-of-fees returns than their average passive counterpart.

Actively managed funds’ recent surge did little to change their long-term track record. Less than one out of every four active strategies survived and beat their average passive counterpart over the ten years through December 2023.

One type of active investment strategy generally trails in long-term success rates.

The US large-cap market has been particularly challenging for active managers due to its competitiveness and representative indexes. Just 12% of them survived and beat their average passive rival over the decade through December 2023.

Index strategies using alternative weighting schemes likely lowered the hurdle active funds had to clear. For instance, momentum strategies held what worked in 2022 rather than piling into the market-leading “Magnificent Seven” stocks. Likewise, those stocks made up a much smaller portion of equal-weighted portfolios.

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.

Active bond managers turned in a 53% success rate in 2023, a swift rebound from last year’s 30% figure. Intermediate-core bond funds led the pack with the highest success rate of the category.

Intermediate-core bond funds invest primarily in investment-grade US fixed-income debt with 2–10-year durations. These fund managers tend to take more credit risk than indexed peers. This likely aided active funds in 2023 as markets rewarded credit risk, after hurting them the year prior.

In less-transparent markets, portfolio managers may have an edge in expertise. Over the decade through 2023, 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%.

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-growth 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.

Active small-cap funds have a 41% success rate over the past 10 years, the highest among all US and foreign stock categories. The long right tail in their excess returns distribution indicates that success can sometimes mean winning big.

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 invest in?

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.