Morningstar Reports Decline in Active Fund Performance Compared to Passive Investments in 2025

Morningstar Highlights Shifting Landscape for Actively Managed Funds

In the latest edition of its semi-annual Active/Passive Barometer, Morningstar reveals a notable decline in the performance of actively managed mutual funds and exchange-traded funds (ETFs) against their passive counterparts. In 2025, only 38% of active funds manage to outperform passive funds after accounting for fees, a decrease from 42% in 2024. This trend is derived from an analysis of 9,248 funds, reflecting a significant shift in the competitive landscape of asset management. The report indicates that active management is increasingly challenged in a market that continues to favor low-cost index-based investing.

The report uncovers significant variations across fund categories. Active management shines in specific niches, particularly within diversified emerging-market funds, where a surprising 64% outperform their passive equivalents. This marks a remarkable improvement of 42 percentage points from just 22% in 2024. On the other end of the spectrum, actively managed real estate funds face substantial hurdles, with only 12% outperforming passive strategies, a staggering decline of 54 percentage points from the previous year. Furthermore, active bond funds also show a downturn in performance, with 40% exceeding the performance of passive options—down from 64% in 2024. Despite this overall decline, active bond funds maintain a solid track record, achieving a 42% success rate over the past decade, positioning them favorably compared to other fund categories.

Industry experts suggest that the outlook for active versus passive funds should be reframed. Financial advisor Mike Casey from AE Advisors emphasizes the potential benefits of considering active and passive funds as complements rather than competitors within a diversified investment portfolio. He notes that the unpredictable nature of market performance necessitates a flexible strategy, leveraging the strengths of both investment types. While 2025 presents challenges for active management in several arenas, the notable success of active emerging-market funds illustrates the continued relevance of active strategies in specific contexts.

Morningstar's report underscores the evolving dynamics in asset management, highlighting both the challenges and opportunities for actively managed funds. While some categories falter, others demonstrate resilience, suggesting that adaptability and strategic diversification remain essential for investors navigating today's market landscape. The findings prompt a re-evaluation of how investors perceive and utilize different types of funds, reminding them of the importance of a balanced approach to asset allocation.