Active funds versus passive indexes: the latest scorecards

Morningstar’s 2024 year-end report

In February 2025, Morningstar released its latest scorecard report of mutual funds, measuring active funds versus index benchmarks as of 31 December 2024. Below is an excerpt of the data from this study. Here “success rate” is defined by Morningstar as the percentage of actively-managed funds that survive and beat the comparable equal-weighted average passive fund return over the given period:

Needless to say, these results are not very encouraging for the actively managed equity funds in particular. Note that all equity entries of the table are 50% or less, with truly grim 10-year and 20-year figures — note only 9.1% of U.S. large value funds successfully beat their benchmark, and only an abysmal 1.1% of large growth funds. The picture is somewhat better in the bond listings — the 1-year, 3-year and 5-year Intermediate core bond figures are higher than 50%, as are the 1-year and 10-year Corporate bond figures. The other notable fact from the above table is the surprising finding that the lowest-fee actively managed funds uniformly had higher 10-year success rates than the highest-fee funds. Additional data (with essentially the same conclusion) can be seen in the Morningstar report.

SPIVA’s 2024 year-end report

Standard and Poor’s also maintains a long-running database of mutual fund performance. Their SPIVA U.S. scorecard was released in March 2025, covering through year-end 2024. It includes data similar to the Morningstar report above, but follows a somewhat different methodology, characterized by (according to their report): (a) survivorship bias correction (funds might be liquidated or merged during the period of study), (b) apples-to-apples comparisons (uses different benchmarks for each category), (c) asset-weighted returns, and other features. Here are some excerpts (success percentages) from their report (note that these figures have been subtracted from 100.00, since S&P reports percentages underperforming their respective benchmarks):

While these results look more promising on a 1-year window, that advantage quickly dissipates with longer horizons: the 10-year and 20-year success rates are even lower than the Morningstar report figures.

Concerns about index investing

So should everyone ditch their active funds and invest in index funds? In 2010, passively managed index funds comprised 19% of the total U.S. investment assets. By 2023, that number had increased to 48%. These developments have prompted concerns from some in the investment community (see this LA Times article and this 2024 report), including:

1. Index investing may lead to market inefficiencies. Since index funds purchase securities without consideration of underlying fundamentals, the relative values of individual securities are not adjusted, thus potentially leading to significant market inefficiencies.

2. Index investing emphasizes certain firms and sectors. Since many stock indices, certainly including the U.S. S&P 500 and London’s FTSE 100, are capitalization-weighted, a few large firms and sectors often dominate the total portfolio. In the U.S., as of 14 March 2025, six large firms, all from the tech sector, namely Apple (6.97%), Microsoft (6.03%), NVIDIA (5.75%), Amazon (4.34%), Meta (parent of Facebook) (2.93%) and Alphabet (parent of Google) (4.24%), constitute 30.3% of the S&P 500. In Europe, five large firms, namely AstraZeneca (8.25%), HSBC (7.81%), Shell (7.51%), Unilever (5.09%) and RELX (3.29%), constitute 32% of the FTSE 100.

3. The shift to index funds appears to be benefiting the largest firms more than small firms. See this report by researchers at U.C. Irvine’s Paul Merage School of Business.

4. The good performance of index funds might be a self-fulfilling prophecy and lead to greater instability. There is concern in some quarters that individual investors may buy such funds mainly because others have achieved good results from them. The flip side of this is that in market downturns, index funds are often dumped by individual investors in waves of panic selling. Thus a large passive fraction in the overall market might exacerbate instances such as the 2010 flash crash, where a stampede effect worsened an unfortunate misstep.

5. Many new exchange-traded index funds (ETFs) appear not to be truly independent of the creation of the index. A 2012 Vanguard report found that the time gap between the publication of an index and the inception of an ETF implementing the index dropped from three years in 2000 to only 77 days by 2011. What’s more, out of 370 indexes for which the authors of the report were able to obtain reliable information, 87% of the indexes outperformed the broad U.S. stock market over the time period used for the backtest, but only 51% outperformed the broad market after inception of the ETF tied to the index. See also this paper, co-written by the present author, especially Figure 3.

It should should be emphasized that such concerns have been raised not just by doomsayers and jealous critics of the index world. Even Jack Bogle, the pioneer of Vanguard’s index funds, expressed some misgivings, prior to his death in 2019: “I do not believe that such concentration would serve the national interest.” On another occasion, he warned: “If everybody indexed, the only word you could use is chaos, catastrophe. … The markets would fail.” At what level would passive funds be a danger? Bogle variously suggested 50% or 70%, but he did not present any data behind these figures.

Does indexing threaten the market?

Some of these concerns were addressed in a 2001 study. The authors studied the problem from several different angles. They concluded:

[T]he flow of funds into the S&P 500 has no identifiable effect on the excess return of the S&P 500 over actively managed mutual funds. This analysis suggests that the success of indexing has not been a self-fulfilling prophecy. … Our results [also] indicate that presence in the S&P 500 definitely does not increase the price of a stock; in fact, inasmuch as it has any effect, it tends to reduce a stock’s price-earnings multiple. … Overall, the evidence is that indexing has not inflated the prices of stocks in the S&P 500.

That study was published in 2001, and, obviously, index-based investing has increased significantly since then, e.g., from 9.9% to 48% of the U.S. market.

In February 2018, Brad Steiman of Dimensional Fund Advisors Canada published an analysis that updated and extended some of the results of the earlier study, analyzing whether indexing has led to a less efficient market. Steiman noted that if this were true, then active managers should, on average, achieve increasingly better results, by exploiting inefficiencies that are indirect results of indexing. To that end, he analyzed the average performance of actively managed U.S. funds from 2004 through 2016, relative to their Morningstar category benchmark. He found that this ratio has been remarkably stable during this period, mostly varying between 30% (in 2012) and 39% (in 2013); the only exception was in 2016, when the ratio was 25%. Needless to say, these data (and the data above) do not support the increasing inefficiency hypothesis.

Steiman also analyzed the extent to which S&P 500 stocks move in lockstep. He exhibited a histogram of the range of S&P 500 index component returns in 2017. These data varied very widely, ranging from +133.7% to -84.0%. Amazon was typical of the above-average gainers, with a 56.0% gain; General Electric was typical of the losers, with a 42.9% decline. Again, such a wide variation in performance largely refutes the hypothesis that indexing has led to inefficient lockstep behavior of the S&P 500 component stocks.

Conclusion

The latest data confirm what many have sensed for years, namely that many actively managed mutual funds are struggling to match passive, index-linked equivalents. Indeed, as can be seen in the data above, relatively few active managers are able to consistently beat passive benchmarks. Thus we can expect more assets to move into index-linked instruments in the future. Indeed, according to this Bloomberg report, assets moving into passively managed large-cap funds in some recent quarters have exceeded assets moving into actively managed large-cap funds.

There is some basis for concern that high levels of indexing may lead to significant market inefficiencies or even, potentially, threaten the stability of markets. So far, however, these concerns appear to be overblown. On the other hand, greater levels of indexing may actually provide increased opportunities for active managers, say by exploiting fundamental weaknesses inherent in index investing, so the indexing trend may actually provide greater impetus for a significant fraction of investment capital to remain actively managed.

Either way, this situation is worth monitoring. In the investment world, no law or principle remains in effect forever.