Passive Investment Performance Superiority Continues

Passive Investment Performance Superiority Continues

Investing in passive, low cost, index-based exchange traded funds (ETFs) continue to produce superior results compared to actively managed funds. This is especially true in the largest investment categories such as large capitalization U.S. stocks which compose 93% of the U.S. stock market. As highlighted below, only 9% of large cap active managers in the blend category produced better returns over the 10-year period compared to low-cost ETFs according to Morningstar Data for the period ended 12/31/2021.

Stock Fund Active Manager Success Rate versus Passive Index Fund or ETF*

The data for style specific strategies, such as growth or value, produce results that are consistent with the blend strategy results. For example, 15% of value managers and 8% of growth managers outperformed for the 10-year period ended 12/31/2021 compared to 9% for the blend category. * Results for active funds are better in the emerging market category where 47% outperform.

Another source of robust data analysis comes from Standard & Poor’s and their S&P Dow Jones Indices. Their data and analysis are consistent with Morningstar. It shows 83% of large cap managers lagged over the past ten years ended 12/31/2021 while 72% of mid cap and 74% of small cap managers lagged over the same period. **

Fixed Income

The same underperformance theme applies to fixed income funds as equity funds. Only 29% of actively managed corporate bond funds have outperformed. *

Bond Fund Active Manager Success Rate versus Passive Index Fund or ETF  

What about adjusting for Risk?

Perhaps active managers systematically take less risk; therefore, it would be expected for them to have lower returns. The data does not support that assumptions. Risk adjusted results produce the same results and conclusions. The dark blue bars in the charts below show the risk adjusted percent of funds lagging their benchmark. Risk adjusted returns are generally not better, and often worse.**

The darker blue bars are the risk adjusted percent of funds underperforming benchmark.
The lighter blue bars are the percentage of funds underperforming benchmarks.
*Morningstar Data as of December 31, 2021
** SPIVA U.S. Scorecard Year-End 2021 RESEARCH | SPIVA 39 GENERAL DISCLAIMER © 2022 S&P Dow Jones Indices.

What about Picking Active Mangers with Low Fees?

If we look at only the active funds with the lowest 20% of fees, the 10-year outperformance improved by only about 10% on average. These funds still vastly lag. * For example, of U.S. Large Cap Blend funds with fees that rank in the lowest 20%, only 19% of those funds outperformed. This compares to 9% of all the U.S. Large Blend funds who outperformed.

Where does Active do better?

Actively managed funds in certain niche markets, where pricing is less efficient and trading is slower and/or liquidity is worse, have a better, have a better chance of outperformance. For example, emerging markets and high yield active managers are more likely to outperform. These are small segments of the investable universe, with high yield about 4% of the U.S. fixed income market and emerging market stocks about 13% of the total global stock market capitalization. ViaWealth uses a modified strategy to offset the inherent challenges of classic broad-based ETFs in certain niche markets.

Can outperforming active managers be selected easily based on past performance?

No. There is no proven correlation between the past success of active funds and future success. There is no reason to think that picking a fund that has outperformed the past 10 years will produce results that are different from the distribution of results shown above.

Why do active managers underperform?

Higher fees and higher portfolio activity leading to higher transactions costs are the primary reasons active managers do not outperform.


At ViaWealth we continue to believe the best way we can meet our client’s investment goals is to utilize low-cost exchange traded funds based on broad-based indices across their investment portfolio. Decades of empirical data prove this strategy is superior to most actively managed funds. We have no reason to believe this will change in the next 10-20 years.

ViaWealth, LLC is a Registered Investment Adviser. Information in this article is for educational purposes only and is not intended to be an offer or solicitation for the sale or purchase of any specific securities or other types of investments. Investing in the securities markets involve risk of principal and unless otherwise stated, returns are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before making any financial decisions. Past performance is not indicative of future performance.

More about the author: Reid Larson

Reid is the Managing Member and Founder of ViaWealth LLC.

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