Index Funds vs. Actively Managed Funds: Do Active Managers Really Perform Better During Market Volatility?
One of the most common questions I receive from retirees and pre-retirees is:
"Should I move out of index funds when the stock market becomes more volatile?"
Many investors have heard that professional fund managers are able to navigate difficult markets better than index funds because they can actively buy and sell investments as conditions change.
It sounds logical.
If markets become unpredictable, wouldn't it make sense to have an experienced investment manager making decisions rather than simply tracking an index?
The reality is more complicated.
While some actively managed funds do outperform during certain periods, decades of research show that most do not consistently beat comparable index funds over the long run—even during volatile markets.
Let's take a closer look.
What Is an Index Fund?
An index fund is a mutual fund or exchange-traded fund (ETF) designed to replicate the performance of a specific market index rather than trying to outperform it.
The most well-known example is the S&P 500 Index, which tracks approximately 500 of the largest publicly traded companies in the United States.
However, there are thousands of indexes covering virtually every segment of the investment world, including:
U.S. large-cap stocks
Mid-cap stocks
Small-cap stocks
International developed markets
Emerging markets
U.S. bond markets
International bonds
Real estate investment trusts (REITs)
The goal of an index fund is simple:
Match the market—not beat it.
If the underlying index gains 12%, the index fund should gain approximately 12% (minus a very small expense ratio).
Likewise, if the index declines 12%, the fund will generally decline by a similar amount.
What Is an Actively Managed Fund?
An actively managed mutual fund is managed by a professional portfolio manager—or, more commonly, an investment team—whose objective is to outperform a benchmark index.
Instead of owning every stock in an index, the manager attempts to identify companies they believe will outperform.
For example, an actively managed U.S. large-cap fund may own only 40–60 companies instead of all 500 companies in the S&P 500.
The hope is that careful research, economic analysis, and security selection will generate returns higher than the market.
Unfortunately, predicting which companies will outperform is extremely difficult.
Managers must not only make better investment decisions—they also have to overcome higher management costs.
The Cost Difference Matters
One of the biggest advantages index funds have is their extremely low cost.
Typical expense ratios include:
Investment TypeAverage Annual CostIndex Funds0.03%–0.15%Actively Managed Funds0.75%–1.25% (sometimes higher)
That difference may not seem significant at first glance.
However, over a 20- or 30-year retirement, paying an additional 1% annually can reduce your portfolio by hundreds of thousands of dollars due to the effect of compounding.
Because of these higher costs, active managers must consistently outperform the market simply to break even after fees.
Do Actively Managed Funds Perform Better During Volatile Markets?
This is where many investors are surprised.
The belief that active managers thrive during volatile markets is widespread.
But the evidence doesn't consistently support it.
One of the most respected sources of investment research is Morningstar's annual Active/Passive Barometer, which compares actively managed funds to comparable index funds across numerous investment categories.
According to Morningstar's most recent report:
Success Rates During 2025
Large-Cap Blend Funds: 32% outperformed comparable index funds.
Small-Cap Blend Funds: 37% outperformed.
Foreign Large Blend Funds: 37% outperformed.
Intermediate Core Bond Funds: 54% outperformed.
While certain bond managers performed reasonably well, the majority of stock managers still failed to beat their benchmarks—even during one of the most volatile market environments in recent years.
Long-Term Results Tell the Bigger Story
Retirement investing isn't about outperforming the market over one year.
It's about creating wealth over decades.
Morningstar's longer-term data paints an even clearer picture.
10-Year Success Rates
Large-Cap Blend: 8.1%
Small-Cap Blend: 15%
Foreign Large Blend: 22%
Intermediate Core Bonds: 41%
In other words:
More than 90% of actively managed U.S. large-cap funds failed to outperform comparable index funds over a 10-year period.
20-Year Success Rates
The numbers become even more compelling over longer periods.
Morningstar found:
Large-Cap Blend: 6.4%
Small-Cap Blend: 5.6%
Foreign Large Blend: 17.8%
Intermediate Core Bonds: 17%
These statistics suggest that consistently selecting an active manager capable of outperforming over multiple decades is extremely difficult.
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Why Is It So Difficult to Beat the Market?
There are several reasons.
1. Markets Are Highly Competitive
Millions of investors—including hedge funds, pension managers, investment banks, and institutional investors—are all analyzing the same information.
Finding undervalued investments isn't nearly as easy as it once was.
2. Predicting the Future Is Impossible
It's easy to look backward and identify companies like Apple, NVIDIA, Amazon, or Netflix that generated exceptional returns.
Predicting which companies will become the next winners is far more difficult.
Past performance simply doesn't guarantee future results.
3. Higher Fees Create a Headwind
Even if an active manager makes excellent investment decisions, higher management fees reduce investor returns.
The manager has to outperform enough to offset those additional expenses before investors see any benefit.
Are Index Funds Better for Retirement?
For many investors, particularly retirees, index funds offer several important advantages.
Diversification
Most broad-market index funds own hundreds—or even thousands—of individual securities.
This diversification reduces company-specific risk.
Lower Costs
Lower expenses allow investors to keep more of their investment returns.
Over decades, this difference can become substantial.
Tax Efficiency
Because index funds trade less frequently than actively managed funds, they often generate fewer taxable capital gains distributions.
This can improve after-tax returns, particularly in taxable brokerage accounts.
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Simplicity
Rather than constantly evaluating fund managers and worrying about whether they will outperform next year, investors can focus on maintaining an appropriate asset allocation and long-term investment strategy.
Are There Times When Active Management Can Make Sense?
Absolutely.
While I generally prefer low-cost index funds for the majority of a retirement portfolio, there are certain situations where active management may be appropriate.
Examples include:
Certain fixed-income strategies
Specialized international markets
Tactical bond management
Unique alternative investments
The key is recognizing that active management should generally be the exception—not the foundation—of a long-term retirement portfolio.
Should You Change Your Investment Strategy During Market Volatility?
One of the biggest mistakes investors make is changing strategies based on recent market performance.
History has shown that markets recover from corrections, recessions, wars, financial crises, pandemics, and periods of elevated inflation.
If your retirement portfolio was appropriately allocated before volatility began, temporary market declines alone typically aren't a reason to abandon your long-term investment plan.
Instead, periods of volatility often become opportunities to:
Rebalance your portfolio
Continue investing through dollar-cost averaging
Harvest tax losses when appropriate
Review your risk tolerance
Ensure your investment allocation still aligns with your retirement goals
Final Thoughts
While actively managed funds occasionally outperform index funds over short periods, decades of research suggest that consistently identifying those winning managers ahead of time is extremely difficult.
For many retirees and long-term investors, low-cost index funds remain one of the most effective ways to build a diversified portfolio while minimizing investment expenses.
Rather than trying to predict which fund manager will outperform next year, focus on what you can control:
Maintaining an appropriate asset allocation
Keeping investment costs low
Remaining disciplined during market volatility
Following a long-term retirement strategy
Successful investing isn't about finding the next superstar fund manager.
More often than not, it's about consistently following a sound investment plan through both good markets and bad.
Have a great week—and I’ll talk to you next Tuesday.
Written by Ryan Morrissey CFP®, CLU®, CHFC®, CMFC
Founder & Principal Advisor of Morrissey Wealth Management
Host of the Retire with Ryan Podcast
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Frequently Asked Questions
Do index funds outperform actively managed funds?
Historically, yes. Numerous studies—including Morningstar's Active/Passive Barometer—have found that most actively managed funds fail to outperform comparable index funds over long-term periods after accounting for fees.
Are index funds safer than actively managed funds?
Index funds are not necessarily less volatile, but they are typically more diversified. Diversification reduces company-specific risk, although all stock investments remain subject to market risk.
Should retirees invest only in index funds?
Not necessarily. Every retirement portfolio should be built around an individual's goals, risk tolerance, tax situation, and income needs. While many retirees use index funds as the core of their portfolio, some may also benefit from selective active management in certain asset classes.
Can actively managed funds outperform during bear markets?
Some do. However, research shows that the majority still fail to consistently outperform comparable index funds, even during periods of elevated market volatility.