- 1Over 90% of active fund managers underperform their benchmark over 15+ years
- 2Passive index funds charge 0.03–0.20% vs. 0.50–1.50% for active funds
- 3The fee difference alone explains much of active management's underperformance
- 4Factor investing (systematic, rules-based) is the "third way" between active and passive
- 5For most investors, a core passive allocation with factor tilts is optimal
#What Is Passive Investing?
Passive investing means buying a broad market index (like the S&P 500) and holding it indefinitely. No stock picking, no market timing — just own the market.
Key characteristics: - Track an index (S&P 500, total market, global) - Very low fees (0.03–0.20%) - No individual stock decisions - Automatic diversification - Tax-efficient (low turnover)
Vehicle: Index funds and ETFs (Vanguard, Schwab, iShares)
#What Is Active Investing?
Active investing means trying to beat the market through stock selection, market timing, or both. Active managers use research, analysis, and judgment to pick winners and avoid losers.
Key characteristics: - Goal is to outperform a benchmark - Higher fees (0.50–1.50%+, plus possible performance fees) - Concentrated positions (30–100 stocks typically) - Higher turnover and tax costs - Requires skill, time, and discipline
#The Scorecard: Active vs. Passive
SPIVA Data (S&P Indices vs. Active)
| Time Period | % of Active U.S. Funds Underperforming S&P 500 |
|---|---|
| 1 Year | ~60% |
| 5 Years | ~80% |
| 10 Years | ~85% |
| 15 Years | ~90% |
| 20 Years | ~95% |
The longer the time period, the worse active management looks. By 20 years, only about 5% of active managers have beaten the index.
#Why Active Managers Struggle
1. Fees
An active fund charging 1% must beat the index by 1% just to break even. That's a significant headwind.
2. Zero-Sum Game
Before fees, the average active investor must earn the market return (because in aggregate, all investors ARE the market). After fees, the average active investor must underperform.
3. Survivorship Bias
Failed funds are closed and disappear from databases. The "surviving" active funds look better than the full picture.
4. Style Drift
Managers who beat the market in one period often change their approach, undermining future results.
#The Case FOR Active Management
Despite the data, active management isn't completely dead:
Market Efficiency Isn't Perfect
Some markets (small-cap, emerging markets, high-yield bonds) are less efficient, offering more opportunities for skilled managers.
Tail Risk Management
Active managers can raise cash during extreme market stress. Passive investors ride the full drawdown.
Factor Exposure
Many "active" managers who do outperform are actually systematically exposed to factors (value, quality, momentum) — which can be captured more cheaply through factor investing.
#The Third Way: Factor Investing
Factor investing sits between active and passive:
| Feature | Passive | Factor | Active |
|---|---|---|---|
| Rules-based | ✅ | ✅ | ❌ |
| Low cost | ✅ | Moderate | ❌ |
| Tries to beat market | ❌ | ✅ | ✅ |
| Transparent | ✅ | ✅ | ❌ |
| Stock selection | ❌ | Systematic | Discretionary |
| Academic evidence | Strong | Strong | Weak (in aggregate) |
Factor investing uses systematic, evidence-based rules to tilt a portfolio toward characteristics (value, momentum, quality) that have historically delivered excess returns. It's:
- Cheaper than active management
- More evidence-based than discretionary stock picking
- More targeted than pure passive indexing
- Transparent and rules-based
#What Should You Do?
For Most Investors
Core-satellite approach: - 70–80% in broad passive index funds (core) - 20–30% in factor-tilted strategies (satellite)
For Self-Directed Investors
Use factor-based tools (like our rankings) to select individual stocks with a systematic, evidence-based framework. This gives you: - Active-like stock selection - Passive-like discipline and low cost - Factor-based edge
For "Set and Forget" Investors
100% passive index funds. Simple, cheap, and beats 90%+ of active managers over time.
#Our Approach
Our ranking model is fundamentally a factor investing system. We provide the research, data, and rankings — you make the final decisions. It combines:
- Academic rigor of passive factor research
- Stock-level granularity of active investing
- Low cost (no management fees)
- Full transparency (our methodology is published)
Last updated: February 6, 2026