Active vs. Passive Funds: Performance in 2025 & How to Choose

The debate between active and passive investing continues, with recent data revealing a nuanced picture.

Published on Feb. 25, 2026

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The debate between active and passive investing continues, with recent data revealing a nuanced picture. Whereas passive funds generally maintain a cost advantage, the performance gap between active and passive strategies is narrowing in certain areas, according to a recent Morningstar report. Understanding these shifts is crucial for investors seeking to optimize their portfolios.

Why it matters

The impact of fees on investment returns cannot be overstated, and the choice between active and passive funds has significant implications for long-term portfolio performance. As investment strategies and market conditions evolve, investors need to carefully evaluate the tradeoffs to determine the optimal approach for their specific goals and risk tolerance.

The details

In 2025, 38% of actively managed mutual funds and exchange-traded funds outperformed their index-based counterparts, a slight decrease from 42% in 2024. Though, this headline figure masks significant variations across investment categories. Areas like emerging markets saw a substantial increase in active fund success, with 64% beating their passive peers – a 42 percentage point jump from the previous year. This suggests that active management can add value in less efficient markets. Passive funds, which track a specific index, remain a cornerstone of many investment strategies, particularly for broad market exposure. Their low expense ratios – averaging 0.135% for ETFs and 0.058% for mutual funds at the end of 2025 – are a significant advantage, especially over the long term.

  • In 2025, 38% of actively managed mutual funds and exchange-traded funds outperformed their index-based counterparts.
  • In 2024, 42% of actively managed mutual funds and exchange-traded funds outperformed their index-based counterparts.

The players

Mike Casey

Founder and president of AE Advisors in Alexandria, Virginia.

Patrick Huey

CFP at Victory Independent Planning.

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What they’re saying

“I don't treat passive and active [funds] as rivals. I treat them as teammates.”

— Mike Casey, Founder and president of AE Advisors

“The closer you get to retirement, the more it begins to matter because you just can't accept the volatility of the general index.”

— Patrick Huey, CFP

What’s next

Several trends are likely to shape the future of active and passive investing, including increased focus on ESG factors, the rise of factor-based investing, and technological advancements in portfolio management.

The takeaway

The choice between active and passive funds is nuanced, with the performance gap narrowing in certain areas. Investors should carefully consider factors like fees, market efficiency, and risk management when determining the optimal investment strategy for their specific goals and life stage.