Active & Passive Can Coexist

June 08, 2021

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Craig Israelsen, Ph.D., creator of the 7Twelve portfolio, consultant to 7Twelve Advisors, LLC and executive-in-residence in the Financial Planning Program at Utah Valley University.

As of Dec. 31, 2020, there were 28,499 funds (mutual funds and ETFs) in the Morningstar database. Of that total, there were 3,056 funds classified as “index funds,” or 10.72% of all funds. Thus, roughly 11% of all funds are “passively” managed. That means 89.28% of all funds are actively managed to one degree or another.

The total number of assets in all 28,499 funds was $30.15 trillion. Index-based funds held $9.9 trillion, or 32.89% of all fund assets. Actively managed funds held $20.23 trillion, or 67.1% of all assets. So, one-third of the assets are in passive funds and two-thirds of the assets are in actively managed funds.


  % of All Funds % of All Assets
Index-Based Funds 10.72% 32.89%
Actively Managed Funds 89.28% 67.11%


Takeaway: Index funds represent roughly 10% of all funds but hold one-third of all assets.

The average annual expense ratio for all 28,499 funds was 0.982%, or 98 bps. The asset-weighted average expense ratio was 0.408%, or roughly 41 bps. Clearly, the largest funds in the mutual fund and ETF universe have very low expense ratios.

To that point, the largest 285 funds (the largest 1% of all funds) hold 47.8% of all assets. The raw average expense ratio among those 285 funds is a mere 27 bps (or 22.5 bps if asset weighted).

Things get interesting when we examine individual fund families. Shown below are two fund families that collectively represent over 1,700 funds (mutual funds and ETFs) and held over $10.3 trillion in assets as of 12/31/2020.  These two fund families represent just 6% of all funds, but hold over 34% of all fund assets.


Fund Family Family Assets
($ million)
% of TOTAL Assets Number of Funds in Fund Family % of TOTAL Funds Actively Managed Funds Passively Managed Funds
% of Funds in Family % of Assets in Family Average Expense Ratio (%) % of Funds in Family % of Assets in Family Average Expense Ratio (%)
Vanguard 7,110,004 23.58% 388 1.4% 41.2% 32.7% 0.23 58.8% 67.3% 0.09
Fidelity 3,191,564 10.59% 1,322 4.6% 93.0% 75.8% 0.79 7.0% 24.2% 0.10


With over $7 trillion in mutual fund and ETF assets, Vanguard possesses almost 24% of all the assets in the universe of 28,499 funds—with just 388 funds—or 1.4% of all funds. Perhaps surprising to some, 41.2% of Vanguards funds are actively managed and they account for 32.7% of Vanguard’s total assets.

The average expense ratio for the 160 actively managed Vanguard funds was 23 bps. Nearly 59% of Vanguard funds are index-based, passively managed funds, and they account for over 67% of Vanguard’s total assets. The average expense ratio for Vanguard’s index-based funds is 9 bps.

With a whopping 1,322 funds possessing $3.19 trillion, Fidelity accounts for 4.6% all mutual funds and ETFs, and 10.59% of all assets. And 93% of Fidelity funds are actively managed, yet 24.2% of all Fidelity assets are in passively managed index-based funds. The average expense ratio for actively managed Fidelity funds is 79% bps, and 10 bps for index-based funds.

Vanguard clearly has a commitment to active management. But when the dust settles, nearly 60% of Vanguard funds and over 67% of Vanguard assets are in passively managed index-based Vanguard funds.

Consider this statistic: Of the $9.9 trillion in total assets that are held in passively managed index funds, Vanguard has $4.78 trillion—or 48.3% of the total. Vanguard manages nearly half of all the index-based assets in the mutual fund/ETF universe with just 228 index funds (representing only 7.5% of the total number of index funds in the universe).

Fidelity, on the other hand, tilts distinctly toward active management. Only 7% of Fidelity funds are passively managed. Interestingly, 24% of Fidelity assets are index-based—suggesting that investors who use Fidelity funds have a disproportionate appetite for index funds relative to the number of index funds in Fidelity’s lineup.

Active Vs. Passive Performance

Much has been written about active versus passive performance. My focus here is to illustrate—using a pragmatic, investable portfolio model—a simple comparison between a portfolio built with actively managed funds and another portfolio built with index funds. I will be using the 7Twelve® model that I designed in 2008. The 7Twelve model is illustrated below.

Each of the 12 “boxes” represents a mutual fund or ETF that invests in that particular asset class. Each box is equally weighted. Only Vanguard funds will be used in this active versus passive performance comparison (see table of results below). The best-performing model each year (either active or passive) is highlighted in yellow.

As you can see, the active model and index model take turns being the winner. Over time, both models produce comparable returns. There is clearly a place for portfolios built with actively managed funds and/or passively managed funds and ETFs. Vanguard’s lineup of funds makes it clear they believe that too.



(For a larger view, click on the image above)


Active & Passive 7Twelve® Models Using Vanguard Funds

(Best performer highlighted in yellow)

Annual Performance (%)
 with annual rebalancing
Vanguard Index
7Twelve Model

(Index-based, passive
Vanguard funds & ETFs)

Vanguard Active 
7Twelve Model

(Actively Managed
Vanguard Funds)

1998 3.05 5.72
1999 15.27 19.76
2000 4.46 5.58
2001 0.06 (1.19)
2002 (2.73) 0.87
2003 27.77 31.89
2004 16.89 17.82
2005 10.8 13.17
2006 15.67 19.36
2007 11.88 10.00
2008 (25.47) (27.98)
2009 26.73 31.00
2010 15.67 15.17
2011 (0.09) (2.64)
2012 11.68 11.12
2013 13.75 9.66
2014 5.77 5.23
2015 (4.14) (3.28)
2016 11.71 11.51
2017 12.35 15.45
2018 (8.49) (7.85)
2019 17.48 17.79
2020 7.03 7.94
3-Year Ave Return (2018-2020) 4.79 5.42
5-Year Ave Return (2016-2020) 7.63 8.57
10-Year Ave Return (2011-2020) 6.39 6.18
15-Year Ave Return (2006-2020) 6.65 6.57
20-Year Ave Return (2001-2020) 7.48 7.87
23-Year Ave Return (1998-2020) 7.48 8.17
Portfolio Expense Ratio in 2021 (%) 0.12 0.37


Contact Craig Israelsen at [email protected]

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