Parnassus Core Select ETF: Assessing the Active Bet in a Challenging Landscape

The Parnassus Core Select ETF (PRCS) launched on December 11, 2024, stepping into a market that has grown deeply skeptical of active management. It is an actively managed, non-diversified ETF with a net expense ratio of 0.58%. Its core strategy is to achieve capital appreciation through a concentrated portfolio of large-cap U.S. stocks, with a focus on companies exhibiting sustainable business practices. On the surface, this is a logical extension of a successful mutual fund approach. Yet its early results and the broader market environment suggest the strategy is already priced for perfection.

The fund's initial performance has been a modest step back. For the final quarter of 2025, PRCS returned 2.58% (net of fees), narrowly underperforming the S&P 500's 2.66%. This isn't a catastrophic miss, but it lands squarely in a challenging landscape. The broader data is stark: over 54% of active large-cap managers trailed the S&P 500 in the first half of 2025. That persistent underperformance, even as markets shifted, has cemented a market sentiment where index funds are seen as the default winner. The setup here is clear. The fund's launch is a bet on active stock-picking, but the prevailing view is that such bets are increasingly difficult to win.

The bottom line is one of expectations versus reality. The fund's strategy-focusing on quality, sustainable companies-is not inherently flawed. But the market has already priced in a high bar for success. With an expense ratio that adds a persistent drag, and with the recent market favoring a handful of mega-cap tech stocks that can be easily replicated in an index, PRCS faces an uphill climb to justify its active premium. Its early underperformance, while small, is a reminder that in this crowded arena, being slightly behind the benchmark is often the same as being left behind.

The Active Management Landscape: PRCS in Context

The launch of the Parnassus Core Select ETF fits into a market paradox that is now the defining feature of the ETF industry. On one hand, active strategies are attracting record flows and launching at a furious pace. On the other, they are struggling to deliver consistent outperformance. This creates a high expectations gap that any new active fund must navigate.

The data on flows is unequivocal. In 2025, active ETFs took in roughly $475 billion, a figure that has already been surpassed by year-to-date inflows of $378 billion. This surge is not a niche trend; it accounts for 35% of all new US-domiciled ETF launches and represents a disproportionate share of new net flows. Investors are clearly seeking the perceived benefits of active management-potential alpha and risk management-within the efficient, tax-advantaged structure of ETFs.

Yet this demand is unfolding against a backdrop of persistent underperformance. The evidence shows that over 54% of active large-cap managers trailed the S&P 500 in the first half of 2025. This gap is not a minor blip but a structural challenge. The market's recent returns have been driven by extreme concentration, with the "Magnificent Seven" stocks accounting for a massive portion of the index's gains. This environment favors passive indexing, which automatically captures the outsized returns of these mega-cap leaders through its market-cap weighting, while active managers must either overweight them (reducing diversification) or risk falling behind.

For a new entrant like PRCS, this sets a difficult stage. The fund is launching into a category that is itself a major growth engine, which speaks to the demand for active strategies. But that same demand intensifies competition for alpha, making it harder for any single manager to stand out. The market sentiment here is one of cautious optimism: there is strong appetite for active ETFs, but the bar for justifying their higher costs has never been higher. The fund's early performance, while modest, is a reminder that in this crowded and skeptical landscape, being slightly behind the benchmark is often the same as being left behind.

The Strategy in Practice: Drivers of Performance and Risk

The fund's early performance tells a clear story of where the active bets went wrong. For the final quarter of 2025, PRCS returned 2.58% (net of fees), just behind the S&P 500. The primary driver was its sector exposures. Holdings in Financials, Consumer Discretionary and Materials underperformed the broader market, pulling the fund down. This is a classic case of active management failing to anticipate sector rotation. In a quarter where other sectors led, the fund's concentrated bets in lagging areas created a direct drag on returns.

This underperformance is compounded by the fund's operational characteristics. With a portfolio turnover of 33%, the strategy is inherently active and dynamic. While turnover can be a tool for capturing alpha, it also introduces costs and tax inefficiencies that are not present in a buy-and-hold index. For a fund with an expense ratio of 0.58%, this adds another layer of pressure on net returns. The high turnover suggests the managers are frequently adjusting the portfolio, which may be necessary for their stock-picking approach but also increases the friction that can erode gains over time.

The most significant structural risk, however, is concentration. PRCS is a non-diversified fund, meaning it can invest a larger portion of its assets in fewer securities. Its portfolio holds just 27 holdings, with the top ten comprising 61% of the portfolio. This creates a high level of single-stock and sector risk. While this concentration is the trade-off for the potential alpha from active stock selection, it also magnifies the impact of any individual holding's poor performance. The recent sector underperformance is a direct consequence of this concentrated approach.

Viewed another way, the fund's risk profile is a direct reflection of its active mandate. The high turnover and concentration are not bugs but features of the strategy. The market has already priced in a high bar for success in this crowded arena. For PRCS to justify its active premium, its managers must not only pick winners but also avoid the losers in a concentrated portfolio, all while navigating a market environment that has historically favored passive indexing. The early results suggest this is a difficult, if not impossible, task.

Valuation and the Expectations Gap

The fund's structure offers a clear cost advantage, but that alone does not close the expectations gap. With a net expense ratio of 0.58%, PRCS sits below the category average of 0.81%. In a market where active ETFs are attracting record flows, this pricing is a logical entry point. It lowers the hurdle for investors to try a new active strategy, especially one with a socially responsible mandate. Yet, the fund's flat year-to-date performance raises a fundamental question: does this cost advantage translate into a sustainable edge, or is it simply the baseline price for participating in a crowded, underperforming category?

The market has already priced in the "active" and "sustainable" themes. The launch of PRCS into a landscape where over 54% of active large-cap managers trailed the S&P 500 in the first half of 2025 suggests that the premium for active management is not being rewarded. The fund's early results, a 2.58% return underperforming the S&P 500's 2.66% in the final quarter, are a microcosm of this broader struggle. It indicates that the active bets-particularly in lagging sectors like Financials and Materials-are not generating the alpha needed to justify the active premium, even with a lower fee.

The key risk is that the fund's concentrated portfolio and high turnover leave little room for error. With just 27 holdings and the top ten comprising 61% of the portfolio, any misstep is magnified. The strategy's reliance on high-conviction stock picking, as highlighted by its 40-year history of Parnassus Investments, is a double-edged sword. It promises potential outperformance but also demands consistent, superior judgment in a market that has historically rewarded passive indexing. The fund's early performance suggests that judgment has not yet been validated.

Viewed another way, the fund's existence is justified only if a clear, differentiated strategy emerges. The current setup-a new, concentrated active fund with a lower fee but no clear alpha-is a bet that the market's skepticism is misplaced. The risk/reward ratio here is asymmetrical. The downside is a persistent drag from fees and concentration, while the upside requires a significant and sustained outperformance that the recent data does not support. For now, the fund's structure offers a cost-efficient way to access an active strategy, but the market has already priced in a high bar for success.

Catalysts and What to Watch

The investment thesis for PRCS hinges on a few near-term catalysts that could validate or undermine its existence. The most immediate factor is a shift in sector leadership. The fund's underperformance in the final quarter was driven by its holdings in Financials, Consumer Discretionary and Materials. If these sectors regain momentum and outperform the broader market, it would directly improve the fund's relative standing and demonstrate the potential of its active sector bets. Investors should watch for this rotation, as it would be a clear signal that the fund's concentrated portfolio is beginning to work.

More broadly, the primary catalyst is a change in market sentiment toward active management. The fund was launched into a landscape where over 54% of active large-cap managers trailed the S&P 500 in the first half of 2025. For PRCS to justify its active premium, the consensus view must shift. This could happen if the current era of extreme market concentration begins to wane, creating more opportunities for stock-picking alpha. A broader re-rating of active strategies would benefit PRCS, particularly given its lower expense ratio of 0.58% compared to the category average.

The key test, however, is consistency. With an inception date of December 11, 2024, the fund's 1-year track record is still very short. The market has already priced in a high bar for success in this crowded arena. To build credibility, PRCS must demonstrate consistent alpha over the next 12-18 months. This will require its managers to not only pick winners but also avoid the losers in a concentrated portfolio, all while navigating a market environment that has historically favored passive indexing. The fund's high portfolio turnover of 33% suggests an active approach, but sustained outperformance is the only metric that will matter.

In practice, the risk/reward ratio is asymmetrical. The downside is a persistent drag from fees and concentration, while the upside requires a significant and sustained outperformance that the recent data does not support. For now, the catalysts are external-sector rotation and a shift in market sentiment-rather than internal execution. Investors should watch these factors closely, as they will determine whether PRCS can move from being a new entrant in a skeptical market to a validated active strategy.