Passive Index Funds Outperform Actively Managed Funds, Study Finds

A Morningstar study found that passively managed index funds generally outperform actively managed funds due to lower operating costs. This trend holds true for both stock and bond funds, especially over longer periods. Investing in index funds can improve your odds of success in any market climate and is especially important for employer-sponsored 401(k) plans.

A recent study by Morningstar has revealed that passively managed index funds consistently outperform actively managed funds, particularly over longer periods. This trend holds true for both stock and bond funds, offering investors a more reliable approach to portfolio management.

According to the study, only 33% of active funds survived and outperformed their average passive peer during the 12 months through June 2025. This performance gap is largely attributed to the lower operating costs associated with passive funds, which can significantly impact long-term returns [1].

The study also highlighted the challenges faced by active managers in navigating market volatility. Fixed-income categories, in particular, faced substantial declines due to stubborn long-term rates and periods of widening credit spreads. The success rate for active corporate bond funds dropped to a mere 3.9% over the 12 months through June 2025, underscoring the difficulties in managing riskier strategies [1].

Investors should note that success rates vary across different categories. While the success rates for US stocks and real estate funds declined, international stock categories saw an increase in success rates. However, these fluctuations highlight the importance of considering longer time horizons when evaluating fund performance [1].

The study also emphasized the role of costs in determining fund success. Funds in the cheapest quintile had a significantly higher success rate (27%) compared to those in the priciest quintile (15%) over the 10-year period through June 2025. This underscores the importance of cost considerations when selecting investment funds [1].

In addition to the Morningstar study, there have been recent developments in retirement planning that could further influence investment strategies. President Trump's executive order aims to modernize retirement accounts by allowing the inclusion of cryptocurrencies such as Bitcoin ETFs in 401(k) plans. This move could inject billions of dollars into cryptocurrency markets and provide investors with new options for diversifying their retirement portfolios [2].

Investors should consider these findings when making decisions about their investment strategies. Passively managed index funds offer a reliable and cost-effective approach to portfolio management, especially over longer periods. As retirement planning evolves, incorporating alternative assets like cryptocurrencies could provide additional diversification benefits.

References:
[1] https://www.morningstar.com/funds/passive-funds-beat-active-amid-this-years-market-volatility
[2] https://coincodex.com/article/71228/trump-executive-order-crypto-401k-retirement-plans/