Research completed by Cerulli Associates in 2025 found that more than half of asset owners cited risk-adjusted returns as the biggest factor they consider when identifying the best investment strategies for their portfolios, regardless of whether the approaches are active or passive.
“We think that the best answer is that allocators should be both passive and active, depending on the situation,” says Gary Stringer, a senior portfolio manager at Shelton Capital Management. “For example, passive investing is great for efficient markets where active management is unlikely to add much value, so cost becomes more important. Gaining access [to] large-cap U.S. equity is better done cheaply and efficiently through passive investments.”
Less efficient markets are better accessed through active management, Stringer notes.
“In certain areas of the fixed-income markets—especially in areas where credit risks and liquidity risks are more pronounced, such as within the bank loan space or with asset-backed securities—active management can add value with both risk reduction and better returns than passive strategies,” Stringer says. “The same holds true for alternative asset markets, such as with equity option overlay strategies.”
The Cerulli research noted that for allocators that prefer passive strategies, cost is often cited as the reason, with others including efforts to minimize risk exposures in their equity portfolios and to maximize risk budgets for higher-cost alternative strategies.
“We believe passive investing solved an important problem around cost, transparency and access to market beta,” says Arnim Holzer, global macro strategist at Easterly EAB. “But increasingly, investors are also recognizing that owning the index may not necessarily be the same as owning diversification.”
Holzer points to four themes that are increasing in relevance:
- Low-cost exposure and optimal portfolio construction may not always be the same thing;
- Passive and active portfolios can both carry significant embedded correlation risk;
- A focus on a strategy’s downside experience and the path of returns, not just long-term averages; and
- The discussion should be more complex than merely “active vs. passive” and should include portfolio construction, diversification quality and risk function.
“Additionally, with [a traditional 60/40] asset allocation coming more under fire because of greater concerns around inflation and rates, we believe understanding the real nature of diversification is becoming increasingly urgent,” Holzer says. “Over the last several years, narrow leadership, benchmark concentration and changing correlation structures have raised important questions around how portfolios actually behave during periods of stress and repricing.”
Strengths and Weaknesses
The pros and cons of each approach are apparent. Passive investing offers lower fees, greater transparency, and minimal manager oversight. Active investing introduces greater fees, more need for monitoring, evaluation and manager turnover decisions, while requiring more internal governance capacity.
One drawback of passive investing is the lack of control over the portfolio—investors might be unable to adjust underperforming or risky sectors or companies. “For allocators, the key is determining whether those benefits are real enough to justify the added cost, complexity, and monitoring burden,” says Eric McCarthy, managing principal at private markets investment firm Immoderata LLC.
Performance data are clear on which approach has higher long-term returns: According to data from Morningstar, over the last 10 years, 38% of active strategies beat their asset-weighted average passive composite, and just 21% of funds beat their average indexed peer. Morningstar also noted that some active funds are worth the premium and the fees.
Cerulli Director Brendan Powers stated it this way in the firm’s report: “For asset managers offering passive strategies, a clear opportunity exists to continue to capitalize on their use by emphasizing the low-cost nature of passive strategies relative to active strategies.” However, “while significant demand still exists for active managers, they need to be best-of-breed if in an asset class in which passive will be sought after (e.g., large-cap equities); otherwise, they may be in an uphill battle to find winnable mandates.”
In the Context of Increased Volatility
In an era marked by significant market volatility, active managers are highlighting their ability to take advantage of market fluctuations. Passive management—designed to track a benchmark—can leave portfolios fully exposed to broad market drawdowns and increasingly concentrated index exposures, limiting flexibility during periods of dislocation.
“We had all the tariff uncertainty in 2025—that’s led into more of a geopolitical form of uncertainty,” says Todd Brighton, a portfolio manager at Franklin Templeton. “Uncertainty makes things difficult, but it also presents opportunities for portfolios, so certainly we have been very active. I think this is a great time for active management to be able to be nimble, to be able to react to opportunities that are in the market.”
Volatility concerns have become more pronounced as equity markets have grown more concentrated. By mid-2025, the 10 largest companies in the S&P 500 accounted for nearly 40% of the index’s value, according to data from S&P Global, raising the question of whether passive exposure to “the market” still delivers true broad diversification.
“In the prior environment—and there’s still this belief that—passive investing is the only way that you can add value to portfolios because, in general, it’s lower fee and it’s been viewed as the prudent approach,” Holzer says. “I think in this [present-day] environment, if you believe that there’s more elevated volatility and more differentiation or divergence of performance because correlations aren’t as stable, then passive investment may not actually be the be-all and end-all.
Holzer also notes that active managers can respond pragmatically, something that could be more sustainable for portfolios than using passive, beta-sensitive approaches.
A J.P. Morgan Asset Management report noted that passive investing is most suitable when the benchmark against which assets are measured fully represents the targeted opportunity set, when the benchmark methodology is a logical basis for capital allocation and when the benchmark avoids obvious structural inefficiencies.
At the same time, active management is best when skilled managers can outperform in the aggregate, individual managers consistently outperform and after-fee alpha is sufficiently positive to justify manager selection.
Active ETFs Grow
Institutional investors are also increasingly looking at exchange-traded funds for tactical exposures to active strategies. Managers are evolving and adding products to meet the demand.
“Not only are we seeing a structural shift toward ETFs because of the benefits that [they bring] investors—trade throughout the day, transparent, typically lower price—we’re now seeing increasingly active investments delivered through the ETF wrapper,” says Bryon Lake, global co-head of third-party wealth and the chief transformational officer at Goldman Sachs Asset Management.
Active ETFs make up 10% of the $15 trillion ETF market, Lake notes, and it is a segment of the market capturing 30% of all inflows into ETFs. It is “dramatically outgrowing the overall ETF industry as investors are looking for different outcomes within their portfolio,” he says.
Investors and managers continue to discuss active ETFs.
“We want to be there to address what the client wants,” says Todd Mathias, Franklin Templeton’s head of U.S. ETF product strategy and development. “It’s one thing for them to say, ‘OK, we want more ETFs,’ but some clients are going to say, ‘Give us exposure,’ ‘We want market-cap exposure,’ ‘We want it as low-cost as possible,’ We have some [offerings] for that But if there’s … actually [demand for] active capabilities, that’s the new part of the conversation, so we have both passive and active, but that’s more driven by client demand.”
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Tags: Active ETFs, Active Investing, active vs. passive, passive investments, Portfolio Construction, Volatility