Active U.S. funds outperform passive counterparts, Morningstar report reveals

EditorPollock Mondal
Published 19/09/2023, 12:38
© Reuters.

In a significant shift, over half of U.S. actively managed mutual funds and ETFs have outperformed their average passive counterparts in the year ending June, according to a recent report by Chicago-based research firm Morningstar. This marks a notable increase from 43% in the calendar year ending December 2022.

The comprehensive study, which incorporated 8,212 funds and ETFs representing around $17 trillion in assets or approximately 55.9% of the U.S. fund market as of June 30, showed that active funds excelled across multiple asset classes and nearly all categories monitored by the firm. The only category not keeping pace was corporate bond funds, with just 40% outperforming passive rivals during the same period.

Active small-cap funds led the way with a success rate of 65%, outpacing the 56% of active mid-cap funds and 53% of active large-cap funds. These figures represent an increase from the previous year's rates, which were 55.8%, 49%, and 39% respectively for each category. Active small-cap funds typically enjoy higher long-term success rates due to their market being "relatively less liquid and efficiently priced."

The most significant annual change was observed in active funds focused on international stocks. Over 63% of these funds surpassed their average passive peer, marking a surge of 30 percentage points from the previous year. The foreign-large-cap-value category led this trend with a success rate of 75%, the highest for any equity category.

Active bond funds also demonstrated strong performance this year, with 55% beating the passive average, a substantial increase from 30% in June 2022. Active intermediate core bond funds, which typically assume more credit risk than indexed peers, likely benefited from this trend.

However, despite these impressive short-term results, the long-term track record of active funds remained largely unchanged. Only one in four active strategies managed to outperform their average passive counterparts over the decade ending June 30. Long-term success was higher among foreign equities, real estate, and bond funds, while U.S. large-cap funds recorded the lowest rate.

The report also highlighted a correlation between fund expense and performance. Approximately 31% of active funds in the cheapest quintile surpassed their average passive peers compared to only 19% in the most expensive quintile, indicating that less expensive active funds tend to outperform more costly ones.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers
© 2007-2024 - Fusion Media Limited. All Rights Reserved.