Key Points
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Historically, fund managers have not outperformed passive investing, but that may be changing.
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Higher fees have created headwinds that account managers haven’t always been able to overcome.
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You can expect a higher number of trade fees when your ETF is actively managed.
Given the popularity of exchange-traded funds (ETFs), it’s hard to believe that the very first one became available in the U.S. in 1993. That was the year the SPDR S&P 500 ETF debuted, offering a basket of securities and tracking the performance of the S&P 500 index.
In the intervening 33 years, investors have found numerous reasons to give ETFs a key role in their diversified portfolios. Most ETFs are passively managed, a fact that has led to attractively low expense ratios.
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That’s not to say that all ETFs are passively managed, though. In fact, active ETFs (professionally managed) account for roughly 80% of all new ETF launches in 2026. Given market volatility and the challenges of emerging markets, it’s easy to understand why. However, the question is whether a managed fund is likely to outperform a passive fund over the long term.
How active and passive funds differ
The core objectives of passive ETFs are different from those of actively managed ETFs. Here’s how:
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Passive ETFs: Track an index, such as the S&P 500 or Russell 2000, to match the index’s performance, before fees.
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Actively managed ETFs: The goal is to outperform a benchmark, or achieve a specific objective, such as providing income or lower volatility. It’s up to managers to make discretionary decisions about what to buy and sell, and when.
Greater assistance leads to higher costs
Actively managed funds typically charge higher fees to cover research and management. Plus, actively managed funds tend to engage in frequent trading, as actively managed ETFs seek to outperform the index they track. Each of those trades adds to the ETF’s cost.
While a passive ETF’s average expense ratio is around 0.10%, owners of actively managed ETFs pay an average expense ratio of roughly 0.69%. While it doesn’t sound like much, even a small difference can significantly affect how much money you end up with in retirement. After all, every dollar you pay toward expenses is a dollar that can’t be reinvested or earn compound interest.
The all-important question: Do professionally managed ETFs beat passive funds?
The short answer is yes, sometimes. However, most do not, particularly over long periods and after fees are deducted. The S&P Indices Versus Active (SPIVA) U.S. Scorecard, covering 2025 and published earlier this year, found that 79% of actively managed large-cap U.S. equity funds underperformed the S&P 500 last year, and most active funds lagged behind their respective indexes. In fact, over 10 years, only 24% of active ETFs beat their benchmarks.
While history indicates that passively managed ETFs have outperformed actively managed funds, that may not always be the case. As fees drop on actively managed accounts, the playing field levels a bit, and the gap between passive and managed ETF performance narrows.
Before investing
Don’t decide on an ETF until you ask the following questions:
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Who manages your ETF, and what is their track record?
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Is there a key person making the decisions, or is it a team?
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In what environments is this fund likely to underperform?
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What is the total expense ratio, and how does it compare with its passive or active peers?
Finally, ask yourself what role the ETF will play in your portfolio. Will it create greater balance? If the answer is yes, it’s time to decide whether you want someone to manage the fund, or if you will oversee it yourself.
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Dana George has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.