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- A Morningstar study reveals that passively managed index funds generally outperform actively managed funds.
- Lower operating costs are a key factor in the superior performance of index funds.
- This trend holds true for both stock and bond funds, especially over longer periods.
If there’s one simple investment maxim that will improve your odds of success in any market climate, it’s this: Keep your costs down.
This can be especially important with mutual funds and exchange-traded funds, as researcher Morningstar affirmed in a newly released study. The company found that funds of either type that buy and hold preselected baskets of stocks or bonds, as grouped in indexes, usually beat those managed by professionals trying to pick winners. The main reason: Index funds are cheaper to run, with cost savings passed on to investors.
Index funds are those that hold groupings of stocks such as the 500 companies in the Standard & Poor’s 500 index. There are many other indexes, including those focused on bonds, foreign stocks and real estate companies.
This isn’t a new finding: Research by Morningstar and others has supported the idea that passive index funds are a good way to invest. Morningstar describes these funds as “passive” because there’s no ongoing efforts to tweak or alter their portfolios, as opposed to “active” funds run by managers who try to pick future outperformers or make other adjustments. The study analyzed the performance of more than 9,000 funds.
You might think active managers could better react to economic and other developments, but that doesn’t seem to improve their results.
“Elections, executive orders, tariffs and geopolitical risks made for a roller-coaster ride during the 12 months through June 2025,” wrote Bryan Armour, a Morningstar director who co-authored the study. “Conventional wisdom says active managers should better manage those complexities, but performance says otherwise.”
Why should I care about this investing study?
The study offers insights on how you should invest your money. For example, if you participate in an employer-sponsored 401(k) program, you probably have a choice of at least a dozen funds in which to invest, and possibly other options like shares of individual stocks. Placing index funds at the center of your portfolio can be wise, especially if you’re investing for the long haul.
Roughly 44% of Arizonans have access to 401(k) or other retirement programs through work and 31% invest in mutual funds, stocks, bonds or other securities on their own, according to a separate study by the Financial Industry Regulatory Authority. Those figures compare with 52% of Americans overall having workplace retirement plans and 34% investing through outside accounts.
What exactly did the Morningstar research uncover?
Morningstar found that just 33% of actively run mutual funds and exchange-traded funds beat similar types of passive index funds over the 12 months through June 2025 and survived through that period. That’s down from 47% over the prior year and marks one of the largest drops since Morningstar has been conducting this research. Some funds fold from time to time, which is why Morningstar tracked only the ones that survived over the full 12 months.
Exchange-traded funds are similar to mutual funds, except that investors can buy and sell them at different prices throughout the day. Mutual funds, by contrast, typically are priced just at the close of the market’s daily trading session.
Do these results extend to bond funds, too?
Yes. Morningstar found that the difference was even more pronounced on the bond side, with only 31% of actively managed fixed-income funds beating their passive-index rivals over the 12 months through June.
What explains these discrepancies?
In part, even professionals can make blunders when trying to pick stocks or bonds, such as by purchasing at inflated prices, selling too low or investing in bad companies. But even more than this, costs matter. Performance results for mutual funds and exchange-traded funds are reported after expenses have been deducted. As noted, passive index portfolios typically are cheaper to run than those on the active side. Only 15% of the most-costly active funds outperformed their passive-index rivals, Morningstar reported.
Morningstar tallied average investor-borne expenses for active funds at 0.59% a year, equivalent to $59 for a $10,000 investment, compared with 0.11% or $11 for passive index funds. That doesn’t sound like much, but it explains much if not most of the performance gap.
Do the same results apply over periods longer than 12 months?
Yes. They often are even more pronounced over longer periods. For example, just 21% of active funds beat their passive-index peers over the 10 years through June 2025.
Are there investment areas where active managers fare better?
Active managers of funds that buy international stocks did better over the 12 months ending in June, with 52% beating their passive index rivals, up from 44% over the prior year. Bond and real estate funds also typically are competitve with indexing, Armour added.
What conclusions might I draw from this?
One suggestion: It can be wise to incorporate passive index funds, and lower-cost investments generally, into your portfolio. Also, the study should make you skeptical of active funds or stockpickers touting exceptional short-term performance. Anyone can get a hot hand; the question is whether the momentum will last.
Vanguard, Fidelity, Schwab and iShares are among the many groups that offer index funds, including these favorites from Morningstar.
Reach the reporter at russ.wiles@arizonarepublic.com.
