Outperformance Was Elusive For Active Managers in 2025
Almost 1,000 active ETFs launched in 2025, but did their performance substantiate the demand? Across the universe of funds, active managers for ETFs and mutual funds found that outperformance was elusive compared to their passive peers based on the latest Morningstar US Active/Passive Barometer report.
Only 38% of actively managed ETFs as well as mutual funds survived and outperformed their passive counterparts in 2025. This represented a 4% drop in performance compared to the previous year. This highlights a market where active alpha is getting more difficult to attain. The long-term results appear even more sobering. Just 21% of active funds outpaced passive funds across a 10-year timeframe ending in 2025.
Nonetheless, there were some bright spots.
International Alpha
As stock market valuations in the U.S. appear bloated, more investors are looking overseas for opportunities. In terms of performance, active managers in international equities posted a combined 48% success rate.
Among the performers, emerging markets (EM) were head and shoulders above the international field. Active EM managers posted a 64% success rate, proving that opportunities in emerging economies are available for the skilled stock pickers.
“Active diversified emerging-market funds increased their success rates at the highest clip of any category included in this report (42 percentage points) to 64%,” the report confirmed.
The strong exit velocity of the international 2025 investment trend is continuing into early 2026. Roxanna Islam, head of sector and industry research at VettaFi, joined Nate Geraci on a recent episode of ETF Prime to highlight strong international equity ETF flows to start the year. In particular, funds like the iShares Core MSCI Emerging Markets ETF (IEMG), Vanguard Total International Stock ETF (VXUS), and the Vanguard FTSE Developed Markets ETF (VEA) are seeing early interest.
Because they occupy significant market share, it’s worth noting that active managers in U.S. stocks posted a 37% success rate. This is 1% lower than last year. This success rate was duplicated across large- and mid-cap stocks. Small cap stock pickers formed 1 percentage point better at 38%.
Fixed Income Falters
Active managers in the bond market have typically outpaced their passive peers in the long haul. However, 2025 was a departure from the norm. Active bond managers saw a success rate of just 40% in 2025, which represented a drop of 24% compared to the previous year.
Corporate bond funds saw the least success with just a 4% rate or a 63% drop from the previous year. It might be comforting to know that managers performed better with a 38% success rate. Still, it was a drop of 14 percentage points compared to the previous year.
The results may not be appealing in the short-term, but for investors looking at the long-term horizon, active fixed income still remains an enticing proposition.
“Fixed income has been a fertile hunting ground for active managers,” the Morningstar report said, noting that 42% have survived and outperformed the average passive fund, which is “the highest among all categories included in this study.”
“The reward for picking a successful active bond manager also outweighed the penalty of failure, based on positively skewed 10-year excess returns,” the report added. “The value proposition for going active in fixed income remains strong, despite a rough year for active bond managers in 2025.”
Passive Not The Winner Yet
Based on the report, it might seem like the default option is to remain with passive investing, especially taking the lower fees into account. The report highlighted that investors have chosen active fund exposure wisely, noting that “the average dollar invested in active funds outperformed the average active fund in 17 of the 20 categories examined.” In the end, investors are demanding higher quality per dollar.
The H1 2026 Barometer serves as a reminder that alpha is still possible for active managers—particularly in international markets and in the long run, fixed income.
“Don’t declare passive investing the winner yet,” Morningstar also noted in an active versus passive investing report. “Active fund performance varies across investment categories and periods. In some regions, they remain the dominant approach in assets under management.”
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