Passive Investing Takes Center Stage

Fifty years ago, passive fund investing faced criticism as being un-American, yet it has now become a popular choice over active management strategies in the U.S. While passive investing seems to be gaining traction, its appeal varies between equity and fixed income asset classes. This difference might reflect investor sentiment about where active management holds the most potential for success.

A Record Year for Passive Investing

Last year marked a landmark for U.S. open-end and exchange-traded funds (ETFs). Passive strategies attracted a whopping $951 billion, which is the highest inflow recorded for a calendar year. In stark contrast, active funds saw about $187 billion pulled out, resulting in a net difference exceeding $1 trillion favoring passive investments by the end of 2025.

This dramatic shift has significantly expanded the market share of passive investing. By the end of 2025, passive funds had amassed total assets of $19.4 trillion, which represented 55% of the U.S. fund market. Although active funds still boast total assets of $16 trillion, they are gradually losing ground to their passive counterparts.

The Dire State of Active Equity Funds

The outlook for active equity funds is troubling. In 2025 alone, these funds experienced over $5 trillion in outflows, contributing to a total of $3.2 trillion in outflows over the past decade. As a result, their market share has dropped from 58% in 2016 to 37% currently.

Interestingly, foreign active equity funds, including global strategies, have fared slightly better compared to domestic funds in terms of total assets under management. However, as of the end of 2025, the market share of passive international equity funds just surpassed active strategies, representing 52% of the market, up from approximately 48% at the start of the year.

Bond Funds as a Bright Spot for Active Management

Active bond funds face similar overarching trends. The market share of passive fixed income strategies has dipped from 73% in 2016 to 61% today. In 2025, passive funds attracted $303 billion, while active fixed income strategies brought in $237 billion.

Nonetheless, active bond funds still hold a relatively positive position when compared to active equity strategies. Although their market share is decreasing, it remains above 50%. For instance, active strategies account for 86% of assets in categories like municipal bonds.

Moreover, annual flow comparisons show a more encouraging picture. Active equity funds have not seen inflows in any year over the past decade, while active fixed income strategies had notable outflows only in 2018 and 2022, with only 2022 witnessing substantial withdrawals.

Flow Matches Potential for Outperformance

The preference for active fixed income strategies over active equity ones aligns with their potential for outperformance. Passive investing is more appealing in asset classes where active managers often struggle to outshine their benchmarks, making tracking broad indices with low fees more advantageous. This trend is especially true for active stocks, as opposed to bond funds.

While shifts in numbers can occur depending on market conditions that favor one strategy over the other, long-term trends increasingly suggest that active bond funds hold a better chance of success compared to active equity funds. This is evident in key segments like core fixed income and large-cap domestic stocks. For example, looking at a 25-year period ending December 2025, the median active intermediate core bond fund (using the least expensive share class) outperformed the Bloomberg U.S. Aggregate Bond Index 46.8% of the time in three-year rolling periods. In contrast, the median Active Large Blend fund had just a 6.4% success rate against the S&P 500.

Furthermore, the advantages of active bond funds are clear in several Morningstar categories. A recent Active/Passive Barometer study showed that the highest success rate for low-cost equity funds over the last decade was 43.5% in diversified emerging markets. Meanwhile, cheap mid-core bond and active corporate bond funds enjoyed a success rate exceeding 60% over the same time span, with high-yield bonds performing at 46.2%.

Research from Morningstar highlights why there’s a solid case for affordable, effective active bond funds. The intricacies of the bond market and challenges in indexing present a unique chance for skilled active managers to stand out. If active bond managers continue to deliver competitive returns, the outlook for this asset class is likely to remain relatively bright.