Active or Passive? The Question Investors Keep Asking

Active vs. passive investing is one of the most enduring and divisive questions in the industry. Investors want to know: When does paying for active management actually pay off? 

That’s what we tackled in our recent webinar, Active/Passive Barometer: Insights for Investment Success. Drawing on our latest research, we broke down where active strategies have the edge, why cost and category matter more than many investors realize, and what the numbers really say about performance today. 

Here, we dive into the audience Q&A portion of the webinar, covering the questions investment professionals are asking about the debate right now. 

A: At a high level, success rate starts by setting a passive benchmark. For example, if passive funds in a category returned 10% over a 10-year period, we then look at all active funds that existed at the start of that period and ask two key questions: did the fund survive, and did it outperform that 10% benchmark? If it didn’t survive or it underperformed, it’s considered unsuccessful. 

But success rate is just one factor. You can utilize tools like Morningstar Medalist Ratings to incorporate deeper analysis of a fund’s process, people, and long-term potential to outperform across a full market cycle. The takeaway: No single metric tells the full story. The strongest signals come when multiple data points and qualitative insights align. 

A: There are now over 2,500 active ETFs in the US alone, and much of that growth is coming from strategies that look different from traditional active management. Instead of discretionary stock picking, many active ETFs use systematic, rules-based approaches driven by quantitative models. 

That said, there’s still room for both ETFs and traditional open-ended mutual funds. What’s changing is the level of nuance in how we evaluate them. Not all active strategies are created equal. Some are systematic, some are discretionary, and others fall somewhere in between. As the market evolves, there’s a growing need to break these categories down further to better understand where value is being created. 

A: As investor preferences shift, especially toward lower-cost and more tax-efficient vehicles, active managers are evolving alongside them. ETFs offer structural advantages that are hard to ignore. They tend to be more tax efficient and cost-effective, which has driven significant interest from both investors and asset managers. In response, many active managers are bringing existing strategies into the ETF wrapper or launching ETF share classes tied to mutual funds. This hybrid approach can improve tax efficiency across the entire fund structure while also reducing things like cash drag. 

There are also structural differences in how ETFs operate. Unlike mutual funds, ETFs can’t simply close to new investors, so managers often build in broader diversification or different mechanisms to handle inflows and outflows. 

Overall, the shift isn’t just about new products; it’s about adapting strategies to meet evolving investor expectations. 

A: So far, success rates between the two appear relatively close. However, it’s still early. The active ETF market has grown rapidly over the past five years, which makes it difficult to draw long-term conclusions using traditional 10-year success rate analysis. Many of today’s ETFs simply don’t have the track record yet. 

That said, early indications suggest that active ETFs may have a slight edge, largely driven by lower costs. Since fees play such a critical role in long-term performance, even small differences can have a meaningful impact on outcomes. 

The active vs. passive debate isn’t going away, and that’s a good thing. As our analysts revealed, the real question isn’t which approach is better in all cases, but when and how each one makes sense. Success rates, costs, structure, and strategy design all matter, and the most effective decisions come from looking at the full picture. 

The good news? The tools are there to help advisors and their clients make those decisions.