Given the popularity of exchange-traded funds (ETFs), it’s hard to believe that the first one appeared in the US in 1993. SPDR S&P 500 ETF released for the first time, it provides a basket of securities and tracks the performance of S&P 500 index.
Over the past 33 years, investors have found many reasons to give ETFs an important role in their diversified portfolios. Many ETFs are passively managed, a fact that has led to attractively low expense ratios.
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That doesn’t mean all ETFs are passively managed, though. In fact, active ETFs (professionally managed) account for nearly 80% of all new ETF launches by 2026. Given the market volatility and emerging market challenges, it’s easy to understand why. However, the question is whether a managed fund can outperform a passive fund over time.
How active and passive funds differ
The primary objectives of passive ETFs are different from those of actively managed ETFs. Here’s how:
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Inactive ETFs: Track an index, such as the S&P 500 or Russell 2000to match index performance, before fees.
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Actively managed ETFs: The goal is to beat a benchmark, or to achieve a specific objective, such as providing income or low volatility. It is up to management to make discretionary decisions about what to buy and sell, and when.
Greater aid leads to higher costs
Actively managed funds often charge higher fees to cover research and management. Also, actively managed funds are often involved in frequent trading, as actively managed ETFs tend to outperform the index they track. Each of those trades adds to the ETF’s cost.
While the typical ETF expense ratio is 0.10%, owners of actively managed ETFs pay an average expense ratio of 0.69%. While it may not sound like much, even a small difference can have a big impact on how much money you end up with in retirement. After all, every dollar you pay in fees is a dollar that cannot be reinvested or earn compound interest.
The most important question: Do well-managed ETFs beat passive funds?
The short answer is yes, sometimes. However, many do notespecially in the long term and after the funds have been withdrawn. The S&P Indices Versus Active (SPIVA) Scorecard for the US, which covers 2025 and was published earlier this year, found that 79% of large US actively managed equity funds underperformed the S&P 500 last year, and many active funds lagged behind their indexes. In fact, over 10 years, only 24% of active ETFs beat their benchmarks.
