Active managers struggled 'mightily' to beat index funds amid volatility from elections, tariffs, Morningstar finds

A recent Morningstar report reveals active funds significantly underperformed their index counterparts, with only 33% beating them in the past year (July 2024-June 2025) and just 21% over the last decade. This persistent underperformance occurred even amid market volatility, a period active managers often claim to outperform, and is largely attributed to the substantial fee differential, with active funds averaging 0.59% compared to index funds' 0.11%. While active managers struggled particularly in liquid markets like U.S. large-cap equities, they demonstrated better success in less liquid areas such as high-yield bonds and small-cap stocks.

Analysis

Recent Morningstar data highlights a significant and worsening underperformance of actively managed funds against their passive index counterparts. In the year through June 2025, only 33% of active strategies delivered higher asset-weighted returns than their average index equivalent, marking a 14 percentage-point decline from the prior year. This trend holds over the long term, with just 21% of active funds surviving and outperforming over the past decade. Critically, this underperformance occurred during a period of heightened market volatility driven by tariffs and geopolitical risks, directly contradicting the conventional wisdom that active managers excel in such environments. The report identifies the substantial fee differential—an average of 0.59% for active funds versus 0.11% for index funds—as the primary structural headwind. While performance varies by asset class, active management has been particularly ineffective in liquid, efficient markets like U.S. large-cap equities, where only 14% of funds beat their benchmark over ten years. Conversely, active managers demonstrated greater relative success in less liquid sectors, including high-yield bonds, where 43% of funds outperformed over the same period.

Key Decisions for Investors

• Investors should consider overweighting low-cost passive index funds for core U.S. large-cap equity exposure, given the documented long-term underperformance and high failure rate of active managers in this space.
• Focus any allocation to active management on less efficient or less liquid market segments, such as high-yield bonds, small-cap stocks, and emerging markets, where managers have demonstrated a higher probability of outperformance.
• Scrutinize management fees as a primary filter when selecting any active fund, as the significant fee differential of approximately 48 basis points on average is a structural barrier to achieving alpha.
• Be cautious of active managers claiming an edge in volatile markets, as recent data from a 'roller-coaster' period shows this thesis has not held, with many managers mistiming market moves around geopolitical events.