Actively Managed ETFs Outshine Passive Funds: Morningstar

The report shows that actively managed funds are distancing themselves from their passive counterparts.

The fixed income story just keeps getting better, particularly when it comes to active management.

During the first week of September, bond ETFs stood out as the only broad market category to experience net inflows, a trend largely attributed to a combination of investor nervousness about equities and a looming Fed rate cut that will benefit bondholders.

But that asset-flow trend has now been further bolstered by data from Morningstar Inc. showing that actively managed bond mutual funds and ETFs have been standout performers.

The newly released research report shows nearly two-thirds of active fixed income funds outperformed their passive counterparts during the 12-month period through June, led by a 72% success rate for the intermediate core bond category.

According to Morningstar, the active intermediate core bond strategies tend to favor short duration and take on more credit risk than their indexed counterparts, which is an ideal combination in an environment of higher interest rates and narrowing credit spreads that characterized the 12 months through June.

Beyond fixed income funds, Morningstar described the active-versus-passive decision as “basically a coin flip” during the period, which was a slight improvement over the year-earlier period through June 2023.

About 51% of active strategies survived and beat the average passive fund in their Morningstar Category over that span, a tick up from their 47% success rate in 2023.

Active Management Leads

For U.S. equity funds, slightly less than half of active funds beat their average indexed peer over the 12 months through June.

The strongest active category was a large cap, with a 53% success rate, followed by small cap with 52% of active funds beating the benchmarks.

Active mid-cap equity funds brought down the average with just 36% of funds beating their benchmarks.

The latest findings are in stark contrast to the historical average performance of actively managed mutual funds and ETFs, which shows only about 29% of active funds beat their benchmarks over the past decade through June.

Fees were important.

According to Morningstar, over the trailing 10 years through June, more than 32% of active funds in their category’s cheapest quintile beat their average indexed peer, compared with 24% for those in the priciest quintile.